CLEAN DEVELOPMENT MECHANISM IN CHINA

Transcription

1 7275-Cover.qxp 5/24/10 1:40 PM Page 1 Carbon Finance-Assist Program Climate Change Practice - World Bank Institute Phone: Fax: H Street, N.W. Washington, DC 20433, USA Social, Environment, Rural Development Sector Unit Sustainable Development Department, East Asia and Pacific Region, Phone: Fax: H Street, N.W. Washington, DC20433, USA Sustainable Development Department, China & Mongolia The World Bank Office, Beijing Phone: Fax: th Floor, China World Tower 2 No. 1 Jianguomenwai Avenue, Beijing , China CHINA CLEAN DEVELOPMENT MECHANISM STUDY CDM Project Management Center Energy Research Institute, National Development and Reform Commission Phone: Fax: Block B-1518, Jia No. 11, Muxudibeili, Xicheng Dist., Beijing , China Conference Edition CLEAN DEVELOPMENT MECHANISM IN CHINA FIVE YEARS OF EXPERIENCE ( ) FIVE YEARS OF EXPERIENCE ( ) THE WORLD BANK THE WORLD BANK THE GOVERNMENT OF THE PEOPLE S REPUBLIC OF CHINA

2 Conference Edition CLEAN DEVELOPMENT MECHANISM IN CHINA FIVE YEARS OF EXPERIENCE ( ) The World Bank The National Clean Development Mechanism Center The Energy Research Institute of the China National Development and Reform Commission

3 The International Bank for Reconstruction and Development The WORLD BANK 1818 H. St., N.W. Washington, D.C May 2010 All rights reserved Cover design by Jostein Nygard, Circle Graphics and Shepherd Inc. Photos by World Bank Photo Library and Anne Arquit Niederberger This publication is a joint product of staff from the China National Clean Development Mechanism (CDM) Center within the Energy Research Institute of the China National Development and Reform Commission, the World Bank, and others (see acknowledgements). The publication is available online at and While consultations have been considerable, the findings, interpretations, and conclusions expressed in this paper do not necessary reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone , fax , All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 Street NW, Washington, DC 20433, USA, fax , pubrights@worldbank.org

4 Contents ACRONYMS FOREWORD ACKNOWLEDGMENTS EXECUTIVE SUMMARY INTRODUCTION CHAPTER 1 OVERVIEW OF THE GLOBAL AND CHINESE CDM MARKET 1 CDM Background 1 Global Carbon Market Overview 2 Overview of the Chinese CDM Market 6 CHAPTER 2 IMPLEMENTATION FRAMEWORK OF CDM PROJECT MANAGEMENT AND MANAGEMENT INSTITUTIONS IN CHINA 13 CDM-Related National Circumstances 13 Energy and GHG Emissions 13 Relevant Measures and Policies for CDM Projects in China 16 Key CDM Administrative Institutions 18 Domestic Approval Procedure for CDM Projects in China 19 CHAPTER 3 ANALYSIS OF THE CDM MARKET IN CHINA 23 CDM Projects in China 23 Evolution of CDM Implementation in China and Underlying Factors 27 CDM at the Provincial Level 30 Chinese Domestic CDM Market Players 33 Foreign Private Sector Actors 37 Foreign CER Buyers 39 The World Bank s Role in China s CDM Market 39 Successful CDM Projects 40 CHAPTER 4 IMPACTS OF CDM IMPLEMENTATION 45 CDM Contribution toward National Targets 45 Contribution of CDM Implementation to China s NCCP 46 vii ix xi xiii xix CDM IN CHINA iii

5 CONTENTS Reducing Kyoto Compliance Cost for Developed Countries 48 Promoting Sustainable Development of China 49 Technology Transfer 50 Energy Conservation 52 Climate Investment 54 CDM Capacity Building 54 China Clean Development Mechanism Fund 58 CHAPTER 5 CHALLENGES AND OPPORTUNITIES 61 Achievements 61 Challenges and Opportunities 63 Conclusions 68 REFERENCES 71 CASE STUDIES SELECTED PROVINCES AND SPECIFIC WORLD BANK PROJECTS 75 ANNEX 1: MEASURES FOR OPERATION AND MANAGEMENT OF CDM PROJECTS IN CHINA 89 ANNEX 2: CDM-RELATED POLICY FRAMEWORK IN CHINA 93 ANNEX 3: THE CDM PROJECT CYCLE AND APPROVAL PROCEDURE 97 ANNEX 4: MAJOR CDM CAPACITY-BUILDING PROJECTS 101 ANNEX 5: SURVEY QUESTIONNAIRE FOR CDM FOREIGN PRIVATE ACTORS 111 ANNEX 6: IMPLEMENTATION OF CDM PROJECTS IN THE HKSAR 113 FIGURES 1.1 Relevant Periods Shaping Markets According to the Marrakech Accords (Kyoto Protocol) and the Copenhagen Accord (post-2012) Transaction Volume in the Different Carbon Market Segments (million tco 2 e) Share of Different Project Types in Primary CER Transactions (MtCO 2 e CER volume) Average Price in Different Carbon Market Segments ( ) Price Trend for EU Allowances & CERs from August 11, 2008 to April 16, 2010 ( ) Number and Total Cumulative CER Supply Potential Projected for 2012 for Different Types of CDM Projects in the Global Pipeline (URC 2010a, March 1, 2010) China s and Other Countries Share of Registered Projects According to Numbers (left) and Expected Annual CERs (right) Cumulative CERs by 2012 for the 751 Registered Chinese CDM Projects, and the Number of Registered Projects by Type, as of March 1, Projects Approved in China through March 1, Expected Annual CER Volume of Projects Approved in China to March 1, Accumulated CERs in the China CDM portfolio issued by March 1, 2010 compared to CERs to be issued between March 1, 2010 and the end of year iv CDM IN CHINA

6 CONTENTS 1.12 Provincial Distribution of Number of Registered CDM Projects Provincial Distribution of Currently Registered CDM Projects and Cumulative CERs Expected by China s Energy Intensity per Year ( ) Chinese CO 2 Emissions by Fuel (left) and by Sector (right) Key Indicators of China s Emission Development CDM Management Structure CDM Project Approval Procedures in China CDM Projects Registered in China According to Different Sectors Status of DNA-Approved Chinese CDM Projects on March 1, Duration in Days from Start of Public Comment Period under Validation until Registration for the Global Pipeline and Chinese Pipeline Average Duration in Days between Registration and First Issuance Number of Global and Chinese Registered Projects (%) with Different Issuance Success Provincial Distribution of Registered CDM Projects as of March 1, 2010, and Annual CERs Expected Number of Projects Registered (left) and Those Approved by DNA as of March 1, Annual CERs from Registered Projects by Province and Adherence to Chinese CDM Priorities for Registered Projects (left) and DNA-Approved Projects Type of Domestic Enterprises Hosting DNA-Approved Projects Involvement of Domestic Private Sector Consultancies and Academic Institutes in DNA-Approved Projects Difference in Registered Projects between March 2009 and March Stock Taking and Projection of Cumulated Issued CERs by 2010 According to the Sectors under the CNCCP Annex I Countries Cost under Different Assumptions Distribution of CDM Projects with Technology Transfer Regional Distributions of Green Investment Low Correlation of CDM Investment and Per Capita Income of the Recipient Province Distribution of Number of CDM Projects with Green Investment 56 TABLES 1.1 Overview of Issued Chinese CERs by Project Types and Expected 2012 CERs (of registered projects as of March 1, 2010) Greenhouse Gas Emissions in China 16 CDM IN CHINA v

7 CONTENTS 3.1 Types of Registered CDM Projects in China Project Type of DNA-Approved CDM Projects in China Overview of Total CER Issuances According to Project Sectors and Selected Provinces, as of March 1, 2010 (in 000s CERs) Distribution of the 751 Registered CDM Projects by CER Buyers Overview of World Bank CDM Projects in China Characteristic of Successful CDM Projects Targets of CNCCP in the Renewable Energy Sector China s Emission Reduction Targets and CDM Contribution by Indicators for Assessment of Environmental and Sustainable Development Benefits The First 20 Projects in Energy-Saving and -Efficiency Improvement Application of Approved Energy Demand Methodologies CDM Project Registration Process 66 BOXES Notes on Estimated and Issued CERS of CDM Projects 7 vi CDM IN CHINA

8 Acronyms AAU CBM CCX CDM CDMF CEC CER CF-Assist CMM CNCCP COP DNA DOE EB EAU ERs EU-ETS GEF GHG HFC HFC-23 HKEPD HKSAR IET LDC ME MOF MOFA MLTPEC MOST Assigned Amount Units Coalbed Methane Chicago Climate Exchange Clean Development Mechanism China Clean Development Mechanism Fund China Environmental United Certification Center Co. Certified Emission Reduction Carbon Finance Assist Program Coal Mine Methane China s National Climate Control Program Conference of the Parties Designated National Authority Designated Operations Entity CDM Executive Board EU Allowance Unit Emission Reductions European Union Greenhouse Gas Trading Scheme Global Environment Facility Greenhouse Gas Hydrofluorocarbon A specific hydrofluorocarbon that is also a potent GHG Environmental Protection Department of the HKSAR Government Hong Kong Special Administrative Region International Emissions Trading Least Developed Country Municipal Enterprise Ministry of Finance Ministry of Foreign Affairs Medium- to Long-Term Plan for Energy Conservation Ministry of Science and Technology CDM IN CHINA vii

9 ACRONYMS NDRC NCCCC NLGCC ODA OECD PDD PE RMB RGGI SASAC SOE TA TOE TT UNFCCC WHR WFOE National Development and Reform Commission National Climate Change Coordinating Committee National Leading Group on Climate Change Official Development Assistance Organization for Economic Co-operation and Development Project Design Document Private Enterprise Renminbi, the currency of the People s Republic of China (also called the yuan) Regional GHG Initiative Asset Supervision and Administration Commission of the State Council State-Owned Enterprise Technical Assistance Tonnes of oil equivalent Technology Transfer United Nations Framework Convention on Climate Change Waste Heat Recovery Wholly Foreign-Owned Enterprise viii CDM IN CHINA

10 Foreword The Chinese Government and the World Bank, supported by the Swiss and German Governments, published the report CDM in China: Taking a Proactive and Sustainable Approach in Since then, China has undergone tremendous development in its CDM portfolio, and its position in the international CDM market has changed from entrylevel to that of the country with the largest CDM market share. As part of a program funded by the Carbon Finance Assist (CF-Assist) program of the World Bank, this new report reviews China s CDM development over the last five years. Key themes include how its CDM policies have taken shape, the strength of its institutions, tools available to develop CDM projects, the engagement of international partners, and the nature of challenges lying ahead. In 2004, when we engaged on the first CDM-in-China report, a main question was: How can China learn from other countries more experienced with the CDM to establish itself as an engaged and proactive player in the international CDM market? And now, six years later, this question has turned around 180 degrees and become: How can now other countries learn from China to become active players in the international CDM market? Clearly, China has changed from being an initial learner about the international CDM market to an experienced teacher over the last several years. It has already embraced this role by supporting South-South learning on carbon finance and CDM project development, and will continue to do so. As this report shows, there are remaining challenges with regard to how China can best cope with its rapidly expanding CDM portfolio, how to continue promoting CDM project development in nationally prioritized sectors, how to further direct China s CDM activities towards geographically prioritized areas, and CDM IN CHINA ix

11 FOREWORD how to contribute to shaping the future of CDM and of other related carbon markets post The issue of delays at many stages of CDM development, for many reasons, is common not only to China but to many countries. By reading this report, we hope that you will share our appreciation for how far and fast China has travelled since 2004, as recorded in The Clean Development Mechanism (CDM) in China: Five Years of Experience ( ). Han Wenke Director Energy Research Institute National Development and Reform Commission Ede Ijjasz Sector Manager Sustainable Development Dept, China & Mongolia The World Bank x CDM IN CHINA

12 Acknowledgments As with the first edition of the Clean Development Mechanism (CDM) in China Taking a Proactive and Sustainable Approach report from 2004, this report is also the result of a close collaborative research effort by joint Chinese and international staff. The National CDM Center within the Energy Research Institute (ERI) of the National Development and Reform Commission (NDRC) took on the overall lead in preparation of the report in collaboration with staff from the Agenda 21 office within the Ministry of Science and Technology (MoST). Additional researchers came from INFRAS in Zurich in addition to individual international researchers. We would like to express our gratitude to the multi-donor CF-Assist Trust Fund, which provided the funds to carry out the study and to the Norwegian Embassy in Beijing, which provided funds for an extensive South-South CDM training program in Hubei Province that discussed a first complete draft of this report in May Without this generous support, this study would not have been possible. The Chinese team at the National CDM Center was lead by its Director Yang Hongwei and included Feng Shengbo, Gao Hairan, Guo Tingzhen, Lu Yiqiong, Xing Weinuo, Xiong Xiaoping Yin Xia, Zhang Minsi, Zheng Lurong, Zhang Xiaoqian and Li Suxiao. The team from the MoST Agenda 21 office included Li Gao (now NDRC) and Wang Can. Additional Chinese researchers included Chen Wenying from the 3E Institute at Tsinghua University, Jiang Kejun from ERI, Wen Gang from the CDM Fund Center, and Tian Chunxiu and Li Liping of the Environmental and Economic Policy Research Center of the Ministry of Environmental Protection (MEP). The Chinese team was supported by an international expert team that included Othmar Schwank, Juerg Fuessler, Madeleine Guyer and Axel Michaelowa from INFRAS and Anne Arquit Niederberger from Polity Solutions. Under supervision by Ede Ijjasz and Magda Lovei, World Bank staff included Jostein Nygard and Carter Brandon (co-task Team leaders), Cheng Zhuo and Federica Ranghieri. In order to prepare and review the draft report for publication, the Chinese Government set up an editorial board, which included Su Wei (Director General of the NDRC Climate Change Department) as editor in chief, Sun Cuihua and Yang Hongwei as associate editors, Lu Xuedu, Li Ting, Liu Weihua, Peo Xiaofei, Gao Yun and Wang Shu as editorial board members, and Jostein Nygard and Carter Brandon as representatives from the World Bank. CDM IN CHINA xi

13 ACKNOWLEDGMENTS The report was peer reviewed by Venkata Ramana Putti, Zijun Li (both World Bank) and Haakon Vennemo (ECON-Poyry). Additional inputs, comments and review of the text draft were provided by Johannes Heister, Neeraj Prasad, Nuyi Tao, Susan Shen, Jason Steele and Alexandrina Platonova-Oquab (World Bank staff). The first edition of the report prior to the South-South CDM program was edited by Grammarians while the final edition of the report was edited by Charles Warwick. Shepherd Inc did the design and managed typesetting while photos have been provided by Anne Arquit Niederberger and the World Bank s photo library. xii CDM IN CHINA

14 Executive Summary Following the 2004 publication of CDM in China: Taking a Proactive and Sustainable Approach, the Chinese government and the World Bank have collaborated again to produce this volume entitled Clean Development Mechanism (CDM) in China: Five Years of Experience ( ). This study notes recent CDM developments and achievements in China, illustrates the process by which China has become the world s largest Certified Emission Reduction (CER) supplier, and shows how the country has successfully developed added value by leveraging carbon finance to support its domestic sustainable development priorities. Over the last few years, China has built the most dynamic CDM program in the world. This report highlights the process over the past five years by which China has built a solid system that not only reduces carbon emissions, but also meets national development targets in the 11th Five-Year Plan including energy security, employment creation, reduction of local pollution, and technology transfer demonstration effects. An overview of facts and figures of the Chinese CDM program is given at the end of this Executive Summary. The CDM, part of the Kyoto Protocol, encourages greenhouse gas (GHG) emissions reduction through the purchase of carbon credits. As of March 1, 2010, China is the leading country in terms of the number of registered CDM projects (751 projects, 36.4 percent of the world total), the volume of annual expected certified emission reduction (CER) units (205 million tco 2 e, or 59.4 percent of the total registered), and actual certified emissions reductions (CERs) issued (186 million tco 2 e, or 48 percent). Another measure of the size of the China portfolio is that the number of cumulative ERs shown in the project design documents of these 751 registered projects through 2012 is 962 million tco 2 e (although in reality, not all of these CERs will be issued by that time). The development of projects approved by China s Designated National Authority (DNA) and still awaiting registration by the CDM Executive Board has been even more impressive. As of March 1, 2010, there were 2,413 DNA approved projects in China, or 1,662 more than have been registered. This represents an enormous backlog. The DNA-approved projects total approximately 450 million in annual expected CERs tco 2 e. In terms of the number of registered projects as of March 2010, 49 percent are hydro projects, 22 percent are wind and 10 percent are energy efficiency projects. The distribution is quite different when measured by expected CERs to be generated by 2012 by the 751 projects currently registered: the majority are HFC-23 projects (38 percent), followed by hydro (16 percent), CDM IN CHINA xiii

15 EXECUTIVE SUMMARY N 2 O (10 percent), and wind (9 percent). However, if one reviews the entire pipeline of DNAapproved projects, the pattern shifts, and hydro projects account for the largest single share in expected annual CERs (28 percent), overtaking the expected CERs to be generated by industrial gas projects. The leading provinces in terms of number of registered projects are Yunnan (93 projects, mainly hydro projects), Sichuan (73 projects, also mainly hydro) and Inner Mongolia (56 proj ects, mainly wind projects). The largest cumulative volume of CERs expected by 2012 derives from Zhejiang Province (17 percent of the national total, of which 88 percent will be generated from HFC-23 projects). China s CDM related achievements can be characterized by the following: China s sound CDM regulatory and administrative framework has facilitated the delivery of significant environmental and local economic co-benefits. The Government of China appointed several key administrative institutions to be in charge of supervising the CDM market. The National Leading Group on Climate Change (NLGCC) is responsible for formulating CDM policies and defining standards. It also coordinates the National CDM Board the location of the Designated National Authority. The National CDM Board reviews and approves CDM projects, and supervises CDM implementation. CDM Centers were created and located throughout the country, and a National CDM Fund further contributes to the country s effective CDM institutional framework. CDM projects approved by the Designated National Authority have increasingly been in the three national priority areas designed to achieve a more sustainable national development path: renewable energy, energy efficiency, and methane recovery and use. Each of these areas is deemed to have important spillover (or win-win ) benefits, including: (i) energy security, (ii) employment creation, (iii) reduction of local pollution, and (iv) technology demonstration and transfer. Consistent with its 11th Five-Year Plan, China has steadily broadened its CDM activities away from industrial processes into multiple market areas offering carbon emissions reductions. This steady broadening has enabled China to diversify its carbon markets as well as consider using the CDM for increasingly varied transfers of technology, especially in the energy sector. However, with regard to issued CERs as to date, projects related to industrial processes (especially HFC-23) still dominate, but with a different share of the market: from 77 percent in 2010 to expected 38 percent in China has steadily expanded the CDM portfolio into the poorer provinces of China, especially in the west. Yunnan, Sichuan and Gansu in Western China and Inner Mongolia and Hunan in Central China, all relatively poor provinces on a per capita GDP basis, are the top five provinces in terms of numbers of CDM projects. China has successfully created the China CDM Fund, with payments from all projects receiving CDM revenues. The CDM Fund is reaching the point where it can begin selecting and financing its own projects in China, a unique accomplishment in a developing country. These contributions are beginning to accrue, and the Fund holds around US$750 million as of April There is growing awareness of climate change and a commensurate movement toward developing local capacity to take advantage of CDM carbon finance opportunities. Moreover, China is sharing its experience in this regard with other developing countries. In spite of all of the above positive factors, China still faces challenges in scaling up the CDM market and in achieving CER issuances closer to those originally projected in project design documents. In particular, it is in China s continuing interest to: xiv CDM IN CHINA

16 EXECUTIVE SUMMARY Work with the CDM Executive Board (EB) and Designated Operational Entities (DOEs) to ensure timely validation and registration of DNA-approved projects. The inflow of projects to the stock of registered projects has decreased since the 1st quarter of Project owners currently face significant economic risks due to the time required for validation, and due to the uncertainty of the project registration process and drastically shortened period of CERs to be generated prior to the end of Recent policy decisions by the EB have clarified the responsibilities of DOEs (the third-party companies certified to validate emissions reductions under CDM project agreements), which is useful. The challenge for the DOEs will be to fulfill their responsibilities within the specified times, and to establish sufficient capacity to process the peak load of projects entering the validation pipeline without further delays and risks. A challenge for project developers is to address the additionality criteria adopted by the CDM EB in a proactive and efficient manner. Strengthen the role of the CDM in facilitating new technology transfer (TT). There are numerous barriers to TT under the CDM, but this report finds that under the CDM, TT should not be regarded as an end in itself. Local sustainable development benefits can also accrue to projects that do not involve transfer of advanced technology, such as through the rapid dissemination of existing, perhaps domestically manufactured, technologies. Build human and institutional capacity for the future. Significant efforts will be required to counteract loss in skills and trained manpower as a consequence of the financial market downturn (which has also affected the professional community in the Chinese carbon market). This concern runs throughout the CDM project cycle, from project proponents, to DOEs and brokers interested in developing domestic carbon finance markets in parallel with international ones. Assess challenges in developing the global carbon market. Secondary market CER prices have, after reaching a low of 9 10 euros/cer in early 2009, recovered reasonably above the floor price for primary CERs set by the government of China. Since the summer of 2008, the inflow of new CDM projects to the pipeline has significantly decreased, and may be coming close to a halt by the end of 2010, mainly due to the uncertain post-2012 policy environment. Government and public sector companies, particularly those operating in priority sectors of CDM, could play a role in proactively developing new carbon finance projects and developing innovative methodologies, in order to be better positioned to take advantage of all voluntary and post-kyoto opportunities that may arise. At the international level, continuing changes in CDM rules and changing interpretations of some key principles have generated uncertainty. These include uncertainties related to future emission reduction targets, mechanisms for generating tradable units of emissions reduction, and national mitigation actions by developing countries in the context of sustainable development supported by technology, financing, and capacity building. There are wideranging proposals under consideration. For example, the EU proposal to restrict the access of CERs from non-least developed countries (LDCs) to the European Union Greenhouse Gas Emission Trading Scheme (EU-ETS) market, would strongly affect demand for CDM projects in China. On the assumption that the global CDM market and related carbon markets will continue to operate in a manner that builds on the valuable experience gained under the Kyoto Protocol, China can expand the scope and depth of its participation in future carbon offset markets. While it is well positioned to capitalize on future financing in sectors already experienced in carbon finance, such as renewable CDM IN CHINA xv

17 EXECUTIVE SUMMARY energy, it is also expanding into new market areas such as advanced fossil thermal technologies and energy-efficiency (EE) technologies, as well as moving toward program based mechanisms such as Programmes of Activities (PoA). For example, expanded EE projects in industry, transportation, building, commerce, and residential energy not only generate greenhouse gas (GHG) emission reductions, but would have the added value of contributing substantially to the country s specific sustainable development targets in the 11th Five-Year Plan. A critical challenge for China is to help develop strategies for different energy-intensive sectors, including strengthening the application of CDM methodologies required to boost EE investments and savings, particularly among end users. China supports a continuation of carbon markets, both domestically and internationally. Even during this current period of market uncertainty, strong Chinese commitment will help it continue to be a strong participant in the post-2012 CDM and related carbon markets. OVERVIEW OF CHINA S CDM IMPLEMENTATION STATUS Registered Projects As of March 1, 2010, China is the leading country in terms of the number of registered CDM projects (751 projects, 36.4% of the world total), the volume of annual expected CER units (205 million tco 2 e, or 59.4% of the total registered), and actual CERs issued (186 million tco 2 e, or 48%). The number of cumulative ERs shown in the PDDs of these 751 registered projects through 2012 is 962 million tco 2 e. Sectoral Distribution In terms of number of registered projects as of March 2010, 49% are hydro, 22% are wind and 10% are energy efficiency projects. In terms of expected CERs to be generated by 2012 by the 751 registered projects: the majority are HFC- 23 projects (38%), followed by hydro (16%), N 2 O (10%), and wind (9%). China s and Other Countries Share of Registered Projects According to Numbers (left) and Expected Annual CERs (right) 1.9% 2.1% 3.9% 5.8% 17.9% 36.4% 1.2% 1.2% 1.2% 1.4% 9.2% 1.4% 2.7% 4.3% 6.1% 11.9% 59.4% 8.2% 23.7% China India Brazil Mexico Malaysia China India Brazil Korea Mexico Malaysia Source: Based on data contained in UNFCCC xvi CDM IN CHINA

18 EXECUTIVE SUMMARY Cumulative CERs by 2012 for the 751 Registered Chinese CDM Projects, and the Number of Registered Projects by Type, as of March 1, ,000 Registered Chinese projects as of 1st March kcers 350, , , , , , kcers of registered projects 1st March 2010 Number of registered projects 1st March Number of projects registered 50, Hydro Wind N2O Landfill gas EE own generation HFCs Biomass energy Fossil fuel switch Coal bed/mine methane Solar Cement Biogas (new methane avoidance) 0 Reforestation Source: URC 2010a, and PDDs of registered CERs. Provincial distribution The leading provinces in terms of number of registered projects are Yunnan (93 projects, mainly hydro), Sichuan (73 projects, mainly hydro) and Inner Mongolia (56 projects, mainly wind). The largest volume of CERs by 2012 is from Zhejiang (17% of the national total, of which 88% from HFC-23 projects). Number of Registered Projects by Province Source: China CDM project management database. CDM IN CHINA xvii

19 EXECUTIVE SUMMARY Provincial Distribution of Currently Registered CDM Projects and Cumulative CERs Expected by kcers of registered 180, , , , ,000 80,000 60,000 40,000 20, kcers Number Guizhou Hubei Jiangsu Hebei Fujian Shanxi Henan Guangdong Guangxi Zhejiang Heilongjiang Liaoning Jiangxi Jilin Shaanxi Xinjiang Anhui Chongqing Ningxia Qinghai Beijing Hainan Tianjin Shanghai Yunnan Sichuan Inner Mongolia Hunan Gansu Shandong Number of registered projects Source: URC 2010a. xviii CDM IN CHINA

20 Introduction China and the World Bank agreed that, as part of the World Bank Carbon Finance Assist (CF- Assist) program, it would be useful to review the progress of China s Clean Development Mechanism (CDM) over the last five years, including how its CDM policies have evolved, the tools used in developing the portfolio, and the critical challenges ahead. A significant objective for the government of China is to share with other countries, particularly those in the initial stages of developing carbon finance portfolios, its experiences and achievements in developing its own CDM program. This report examines these experiences from the institutional, political, economic, and technical point of view. This report also identifies the challenges and opportunities for the CDM market in China. As the CDM market enters a period of uncertainty, the main challenges China faces are in capacity building and in raising awareness, mainly among project developers, institutions and consultants. The institutional and administrative bodies that were created in 2007, such as the National Leading Group on Climate Change (NLGCC), which was established by the State Council to coordinate CDM-related issues, are now fully operating. Furthermore, understanding the implications of international negotiations on a post-2012 climate change treaty is an additional challenge, not only for China. Liaising with the CDM Executive Board (EB) at the United Nations Framework Convention on Climate Change (UNFCCC) and overcoming several regulatory and administrative constraints should also be addressed. Several opportunities are envisaged in the report in terms of new sectors and new locations for the development of CDM projects; new mechanisms and broader programs such as the Program of Activities; and the importance of expanding and using new financial instruments. In order to outline and analyze China s steps for developing its valued-added approach for CDM, the report is structured into 5 main chapters. Chapter 1 provides CDM related background information, an overview of the global carbon market and of the CDM project pipeline development. Chapter 2 outlines Chinese CDM related national circumstances, such as climate change related measures and indicators, as well as the regulatory environment of CDM implementation in China. Chapter 3 provides in-depth analysis of the performance of CDM IN CHINA xix

21 INTRODUCTION implemented CDM projects in selected provinces and in specific sectors addressing different trends. It also highlights achievements and barriers as well as investigates CDM market actor patterns in China. Chapter 4 outlines the impacts of the CDM implementation with regard to its national development targets through the 11th Five-Year Plan period, and its contributions to national sustainable development. Chapter 5 provides concluding remarks, noting China s achievements, and enumerating the challenges ahead. Selected project and provincial level case studies are included at the end of the report. xx CDM IN CHINA

22 Overview of the Global and Chinese CDM Market 1 CDM BACKGROUND The ultimate objective of the U.N. Framework Convention on Climate Change (UNFCCC) is to achieve stabilization of greenhouse gas (GHG) concentrations in the atmosphere at a level that will prevent dangerous anthropogenic interference with the climate system. The Kyoto Protocol set legally binding GHG emission reduction targets for developed countries (Annex I) and countries in transition (Annex B countries). The Kyoto Protocol defines three mechanisms to achieve these emission reduction targets in a cost-effective way: (i) international emissions trading (IET), (ii) joint implementation (JI), and (iii) clean development mechanism (CDM). This report focuses on the third of these mechanisms, CDM, in China. CDM is a project-based mechanism under which developed country parties cooperate with developing country parties to assist them in meeting part of the GHG emission reduction obligations of the developed country parties. The core purpose of CDM is to allow developed country parties, in cooperation with developing country parties, to acquire CERs (Certified Emission Reductions) generated by the projects implemented in developing countries. The mechanism is designed to assist parties not included in Annex I in achieving sustainable development and contributing to the ultimate objective of the convention, and to assist those parties included in Annex I in achieving compliance with their quantified emission limitation and reduction commitments. To ensure that emission reductions from CDM projects are real, measurable, and long term and additional to any that would occur in the absence of the certified project activity, a complex body of rules, including third-party Designated Operational Entity (DOE) checks, has been introduced. The application of rules is overseen by the CDM Executive Board (EB). The EB defines three main types of CDM projects as (i) renewable energy, (ii) energy efficiency, and (iii) other types (including methane utilization, afforestation and reforestation, and the chemical industry). Details on the international regulatory framework for the CDM are summarized in Annex 3. China is a party to the UNFCCC and Kyoto Protocol, and CDM implementation and cooperation are important for China to implement its obligation under the UNFCCC and Kyoto Protocol and address climate change with the international community. The government of China s National Development and Reform Commission (NDRC) has published Measures for Management and Operation of CDM Projects in China (the Measures; see Annex 1), which establishes NDRC as the Designated National CDM IN CHINA 1

23 OVERVIEW OF THE GLOBAL AND CHINESE CDM MARKET Authority (DNA). The Measures formulated the regulations for CDM project developers to follow. With government guidance and promotion, CDM projects have been widely implemented in China. According to statistical data as of March 1, 2010, NDRC has approved 2,431 CDM projects, 751 of which have been registered with the CDM EB. GLOBAL CARBON MARKET OVERVIEW As noted, the Kyoto Protocol includes three flexible mechanisms that have led to the development of carbon markets and a price on carbon. Moreover, there are mandatory domestic trading schemes in some Annex B countries. The compliance markets such as the European Union Emission Trading Scheme (EU-ETS) are governed by periods specified in the Marrakech Accords/Kyoto Protocol and the post-2012 period as outlined in Figure 1.1. This report was completed after the 15th Conference of Parties to UNFCCC in Copenhagen in December 2009, during a dynamic period of international debate on the post-kyoto period: The international economic crisis led to an oversupplied market and hence to a significant fall in the price of EU Allowances and of secondary CERs by early 2009 from highs over 20 euros per CER a few months earlier down to below 10 followed by recovery to the euros per CER range. Carbon as a commodity had significantly lost attractiveness for both investors and project developers by the end of There are indications that buyers are seeking to exit emission purchase agreements they assess as too costly. Uncertainty concerning a future international climate agreement, including the prospects for CDM in the post-2012 period, continues. The UNFCCC negotiation process has shown a commitment to using markets to enhance the cost-effectiveness of global mitigation action, and reforms designed to strengthen the CDM are being negotiated. There is stakeholder interest in this mechanism in the post-2012 period. However, uncertainty prevails, particularly on such topics as CDM efficiency, sectoral or programmatic CDM approaches, and enhancing CDM s contribution to national priorities. FIGURE 1.1 Relevant Periods Shaping Markets According to the Marrakech Accords (Kyoto Protocol) and the Copenhagen Accord (post-2012) Kyoto 1 st commitment period CDM prompt start period EU-ETS 1 st period EU-ETS 2 nd period Post Kyoto period = Copenhagen Accord EU-ETS 3 rd period Note: EU-ETS = European Union Emission Trading Scheme. Note: EU-ETS = European Union Emission Trading Scheme. 2 CDM IN CHINA

24 OVERVIEW OF THE GLOBAL AND CHINESE CDM MARKET The transaction volume of the global carbon market has increased rapidly and did not suffer from the financial and economic crisis (Figure 1.2). Overall turnover witnessed spectacular growth from 100 million tco 2 e in 2004 to 8.2 billion in The EU-ETS accounted for 69 percent (more than 5.6 billion t) of the 2009 turnover, followed by CDM, with 19 percent (more than 1.5 billion t), indicating that CDM is approximately a third the size of the EU-ETS. JI, IET, and voluntary schemes have been responsible for only 3 percent of turnover. The volume of voluntary emission reduction in global carbon market is negligible, although North American demand increased during in response to the emerging regional cap and trade regimes. The volumes, in terms of types of projects from which CERs have been transacted, are shown in Figure 1.3. HFC decomposition projects played a key role in , but their transaction share gradually dropped over 2007 and Renewable energy (nearly 45 percent) and energy-efficiency projects (about 35 percent) constituted half of the transaction volumes in 2008, indicating that energy projects increased their market share during Prices paid for units in the different segments of the carbon market have varied widely and been extremely volatile. Figure 1.4 shows the average price in different carbon markets in The price of CER (secondary) rose quickly until July 2008 while the price of EU-ETS for 2008 EU allowance units (EUA) fluctuated between 17 and 25 euro in the period 2005 to the end of October Due to the economic and financial crisis, EUA and CERs prices had fallen under a threshold of 10 euros by February As shown in Figure 1.5, EU allowance and CERs prices recovered by April 2009, and EUAs remained around 13 euros (CERs around euros) in early Generally, prices in voluntary market segments have been substantially lower than in compliance markets and affected more strongly by the FIGURE 1.2 Transaction Volume in the Different Carbon Market Segments (million tco 2 e) 6,000 5,000 4,000 3,000 2,000 EU ETS CDM primary CDM secondary JI IET NSW RGGI Voluntary offsets CCX 1, Source: Point Carbon (2007a, 2008a, 2010e); World Bank (2006a, 2007) for 2004 CDM and JI volume as well as pre vintages of voluntary offsets. CCX = Chicago Climate Exchange (voluntary trading system in the USA). EU ETS = EU emissions trading scheme. NSW = New South Wales (mandatory trading system in the Australian state of New South Wales). RGGI = Regional Greenhouse Gas Initiative (mandatory in 10 states of the US north-east). CDM IN CHINA 3

25 OVERVIEW OF THE GLOBAL AND CHINESE CDM MARKET FIGURE 1.3 Share of Different Project Types in Primary CER Transactions (MtCO 2 e CER volume) MtCO2e Primary CDM annual volumes transacted Other CMM, fugitive and flaring N2O HFC LFG + waste EE + Fuels Renewables Source: WB FIGURE 1.4 Average Price in Different Carbon Market Segments ( ) Euro CER (primary) CER (secondary) EU allowance ERU CCX Source: Point Carbon (2010e, 2009b, 2008a, 2007a, 2006). Note: This includes strongly varying prices according to vintage. By late 2007, EU allowances for 2007 were trading at 0.03 euros, while 2008 allowances traded at above 20 euros. Secondary CER price has always been lower than the highest price of post-2007 vintages on the EU market. economic crisis. The substantial drop in the CER price has slowed the development of new CDM projects. Prior to the Copenhagen meeting, China s State Council unveiled its goal to reduce its carbon intensity (i.e., the amount of greenhouse gas emission per unit GDP) by percent by 2020, compared with Internationally, this signals the seriousness of China in seeking greater commitment from developed countries on GHG emission reduction. Domestically, it increases pressure on provincial and local governments to continually implement energy efficiency and fuel switching policies. To meet the 4 CDM IN CHINA

26 OVERVIEW OF THE GLOBAL AND CHINESE CDM MARKET FIGURE 1.5 Price Trend for EU Allowances & CERs from August 11, 2008 to April 16, 2010 ( ) CER EUA 20 Euro Aug Sep Nov Dec Feb Mar May Jun Aug Sep Nov Dec Feb Mar-10 Source: Point Carbon (2010b) target, market based mechanisms could be used to strengthen the effect of administrative instruments. In anticipation of a robust Chinese carbon market, perhaps independent of the future CDM international trading, China is developing national trading platforms and standards. To date, three energy/environment exchange centers are being established in Beijing, Tianjin and Shanghai, each with different areas of focus. The proportion of governments buying carbon credits in the carbon market has gradually declined, with private sector and funds gradually occupying the main market. According to the World Bank (2009), in 2007 and 2008 the share of governments reached only 10 percent. As the economic crisis has reduced the Kyoto gaps of all European countries, governments are drastically reducing their CER acquisition budgets. Moreover, acquisition of AAUs has now become more desirable, as governments aim to reduce compliance costs. Despite being in surplus in 2009, the EU-ETS has maintained a relatively stable price because EU allowances can be used in its post commitment period. As of March 1, 2010, the global CDM pipeline is expected to deliver 2.8 bn CERs until 2012 according to the projects PDD estimations. The two largest sectors in terms of expected 2012 kcers are HFC and hydropower, jointly corresponding to 28 percent of the total number of projects (see Figure 1.6 ). The global pipeline accounts for almost 5,000 projects as of March 1, However, it is projected that slightly below 1 billion in CERs will actually be issued by the end of 2012 (URC, May 5, 2010). There are several reasons for the steady decrease of the projected total CER supply potential in 2012, including: (a) increased regulatory scrutiny leading to increased rejections and time lags in registration, (b) problems of project developers to actually commission projects due to the global financial market crisis, and (c) underperformance of some projects under implementation. The current projected level of 1 billion in CER issuances is only 35 percent of the 2.8 billion CERs listed in the PDDs, and the various reasons for this difference will be a recurring theme of this report, primarily in Chapter 3. CDM IN CHINA 5

27 OVERVIEW OF THE GLOBAL AND CHINESE CDM MARKET FIGURE 1.6 Number and Total Cumulative CER Supply Potential Projected for 2012 for Different Types of CDM Projects in the Global Pipeline (URC 2010a, March 1, 2010) 600,000 1, kcers 500, , , , ,000 0 Hydro Registered 2012 kcers Request registration 2012 kcers At validation 2012 kcers Total expected number of projects Fossil fuel switch EE industry Landfill gas EE own generation Methane avoidance Biomass energy Wind 1,400 1,200 1, Total number of projects in the global pippeline Agriculture Tidal CO2 capture Afforestation Geothermal PFCs and SF6 Energy distribution EE service Transport HFCs Fugitive EE households Cement Solar Reforestation N2O EE supply side Coal bed/mine methane 0 Note: The blue bars; projects at validation stage, the green bars; request registration, red bar; registered projects. Source: URC 2010a. OVERVIEW OF THE CHINESE CDM MARKET The CDM market in China is burgeoning at a rapid pace and has made a major contribution to the world carbon market, (see Figure 1.7) both in registered projects (left) and expected annual CERs to be generated (right). As of March 1, 2010, China has 751 registered projects, representing 205 million tons of expected annual CO 2 e emissions reductions (a measure of expected annual ERs over the entire crediting period, see the box on the next page for definitions). The number of cumulative ERs shown in the project design documents of these 751 registered projects through 2012 is 962 million. Of that total, 49 percent are hydro, 22 percent are wind and 10 percent are energy efficiency projects (see Figure 1.8). A review of practices in the past five years shows that CDM in China can be characterized by three main features. First, the number of projects approved by the government of China has increased steadily ever since the first project obtained host country DNA approval in November In fact, China currently has 2,413 (Figure 1.9) DNA approved projects, or over three times the number of projects approved by the EB. Not only is China the dominant country in the international CDM market, but it has an enormous backlog of projects with the EB that has been a source of concern. Second, in parallel with the large number of DNA-approved projects, there has been strong growth in the volume of the total CER commitments associated with these approved projects (Figure 1.10). This figure shows that the estimated annual emissions reductions for all DNAapproved projects is nearly 450 million tco 2 e, or twice the amount of the currently registered projects. The quarterly number of approved projects, as well as the volume of CERs, peaked at the end of 2008, and then slightly declined in 2009 and The causes of this decline can be mainly attributed to the uncertain CDM 6 CDM IN CHINA

28 OVERVIEW OF THE GLOBAL AND CHINESE CDM MARKET FIGURE 1.7 China s and Other Countries Share of Registered Projects According to Numbers (left) and Expected Annual CERs (right) 1.9% 2.1% 3.9% 5.8% 17.9% 36.4% 1.2% 1.2% 1.2% 1.4% 9.2% 1.4% 2.7% 4.3% 6.1% 11.9% 59.4% 8.2% 23.7% China India Brazil Mexico Malaysia China India Brazil Korea Mexico Malaysia Source: Based on data contained in UNFCCC Notes on Estimated and Issued CERS of CDM Projects The annual estimated average emission reduction for a given CDM project is the total of its projected emissions reduction (defined as the difference in greenhouse gas emissions after implementation of a CDM project vs. those that would have occurred without the CDM activity the baseline scenario ) divided by the length of the project s crediting period. The crediting period is the period selected by the project participants during which the CDM project activity will generate greenhouse gas emission reductions (and consequently CERs). The crediting period for a CDM project activity may be either (a) a 7-year crediting period, renewable twice; or (b) a single 10-year crediting period. The annual expected ERs for a group of CDM projects, such as all CDM projects in China, is the sum of the individual project annual estimated average ERs, and is a measure of the total size of that portfolio. However, it is independent of any given year, since the individual projects within that portfolio start and stop in different years, and have different durations. One cannot calculate the total amount of expected ER reductions for that set of projects since the crediting period varies by project. Also, the annual expected ERs does not give an idea of CER supply (or demand) for any given year, since the concept is independent of any given year. Finally, for either a given project, or for a portfolio of projects, the total of its projected emissions reductions is typically greater than the actual number of ERs to be issued over the life of the project. First, most crediting periods extend beyond 2012, and there is uncertainty over who will buy (issue) CERs post-2012 (and so are not likely to be included in any current contracts). Second, many projects may experience delays or otherwise under-perform. Third, not all CERs generated by a project may be contracted for purchase, even prior to the end of (The World Bank, for example, will only purchase up to 80% of the expected CERs to be generated by a project.) For all of these reasons, comparisons in this report between annual expected and cumulative issued CERs have to be made carefully. CDM IN CHINA 7

29 OVERVIEW OF THE GLOBAL AND CHINESE CDM MARKET FIGURE 1.8 Cumulative CERs by 2012 for the 751 Registered Chinese CDM Projects, and the Number of Registered Projects by Type, as of March 1, ,000 Registered Chinese projects as of 1st March kcers 350, , , , , , kcers of registered projects 1st March 2010 Number of registered projects 1st March Number of projects registered 50, Hydro Wind N2O Landfill gas EE own generation HFCs Biomass energy Fossil fuel switch Coal bed/mine methane Solar Cement Biogas (new methane avoidance) 0 Reforestation Source: URC 2010a, status March 1, million cumulative CERs projected by 2012 according to the PDDs of registered CERs. FIGURE 1.9 Projects Approved in China through March 1, Quarter approved number Accumulated number Q/2010 4Q/2009 3Q/2009 2Q/2009 1Q/2009 4Q/2008 3Q/2008 2Q/2008 1Q/2008 4Q/2007 3Q/2007 2Q/2007 1Q/2007 4Q/2006 3Q/2006 2Q/2006 1Q/2006 4Q/2005 3Q/2005 2Q/2005 1Q/ Source: China CDM project management database. 8 CDM IN CHINA

30 OVERVIEW OF THE GLOBAL AND CHINESE CDM MARKET FIGURE 1.10 Expected Annual CER Volume of Projects Approved in China to March 1, ,000 50,000 40,000 30,000 20,000 10,000 0 Quarter approved CERs (ktco2e) Accumulated annual CERs (ktco2e) 1Q/2010 4Q/2009 3Q/2009 2Q/2009 1Q/2009 4Q/2008 3Q/2008 2Q/2008 1Q/2008 4Q/2007 3Q/2007 2Q/2007 1Q/2007 4Q/2006 3Q/2006 2Q/2006 1Q/2006 4Q/2005 3Q/2005 2Q/2005 1Q/ , , , , , , , , ,000 50,000 0 Source: China CDM project management database. market post-2012 that has restricted the development of new projects. Third, as a result of international and domestic procedures, there are inherent lags in the process of registering CDM projects as well as in issuing CERs. Chapter 3 illustrates and discusses the status of the DNA-approved Chinese projects and identifies possible barriers in the project cycle. As of March 1, 2010, the Chinese DNA had approved 2,413 projects, of which only 751 (31 percent) had been registered by the CDM EB. Of the registered projects, only 206 (27 percent) have started to issue CERs. Since the first Chinese CDM project the Huitengxile Wind Farm Project was registered on June 26, 2006, the quarterly number of Chinese CDM projects being registered has reached a plateau of about 40 projects. 186 million CERs have been issued by March 1, 2010, which represents only 19% of the expected CERs of currently registered projects through 2012 (see Table 1.1 and Figure 1.11). This implies that 81% of estimated issuances through 2012 will have to occur over the period April 2010 Dec 2012 i.e., 776 million additional CERs. However, for reasons given in the box above, in reality this extremely high level of issuance will not be reached. In fact, as mentioned above, total issuances under the CDM worldwide, including China, are projected to be less than 1 billion. Of current issuances, 77 percent are from HFC-23 projects, around 7 percent from N 2 O projects, 5 percent from wind projects, and 4 percent each from hydro and energy efficiency projects (see Table 1.1). By 2012, however, these percentages will be quite different, as issuances under other projects catch up and reduce the dominance of the industrial gas projects. By the end of 2012, HFC-23 may account for around 38 percent of the total, followed by hydro (16 percent), N 2 O (10 percent), wind (9 percent), and energy efficiency (8 percent). While the earliest registered non-co 2 projects like HFC23 already have about 40% of their CERs issued by March 1, 2010, most sectors have the large majority of CERs still to be issued between March 1, 2010 and the end of 2012 CDM IN CHINA 9

31 OVERVIEW OF THE GLOBAL AND CHINESE CDM MARKET TABLE 1.1 Overview of Issued Chinese CERs by Project Types and Expected 2012 CERs (of registered projects as of March 1, 2010) Cumulative estimated CERs Share of Share of Expected share of registered Issued CERs estimated issuances as of issuances projects by end by 1st March CERs still to of 1st March by De (000s) 2010 (000s) be issued (%) 2010 (%) kcers (%) Hydro 154,953 7,483 95% 4% 16% Wind 85,777 9,641 89% 5% 9% EE own generation 73,665 7,029 90% 4% 8% Landfill gas 21, % 0% 2% N2O 98,715 12,794 87% 7% 10% Coal bed/mine methane 62,747 2,753 96% 1% 7% Fossil fuel switch 83,499 1,994 98% 1% 9% Biogas (new methane 1, % - 0% avoidance) Cement 4, % - 0% Biomass energy 11, % 0% 1% HFCs 362, ,366 60% 77% 38% Solar % - 0% Reforestation % - 0% Total 962, ,954 81% 100% 100% (e.g., hydro with 95%, wind with 89%, fossil fuel switch with 98%). Other smaller sectors like biogas, cement, solar and reforestation sectors have still not issued any CERs. A tremendous number of CERs are still to be issued, not least in China s prioritized sectors. Figure 1.12 illustrates the provincial distribution of registered CDM projects. This map clearly shows that the central regions are relatively well represented in the CDM, in spite of being less developed in terms of GDP per capita than the eastern regions. To date, however, the far western provinces are less well represented. More province-specific details are given in Figure 1.13, which shows that more registered projects are located in Yunnan Province (93 projects, 12 percent of the total) than in any other province. These are mainly hydro projects, followed by three N 2 O and two landfill gas projects. 73 projects, mainly hydro, are located in Sichuan Province (10 percent), while 56, mainly wind projects, are located in Inner Mongolia (7 percent). The largest share of expected CERs (in the period up to 2012) come from Zhejiang Province, which is expected to generate 15 percent of CERs, mainly from HFC-23 projects. Jiangsu Province, with a total of 28 projects, is expected to produce 14 percent of the total CERs, mainly from renewable energy and HFC- 23 projects. Shandong Province is expected to generate 10 percent of the total CERs from 34 projects, mainly from the wind sector. Liaoning Province is expected to produce 7 percent of the total CERs deriving from 17 projects distributed equally among wind, landfill, energy efficiency and N 2 O sectors. 10 CDM IN CHINA

32 OVERVIEW OF THE GLOBAL AND CHINESE CDM MARKET FIGURE 1.11 Accumulated CERs in the China CDM portfolio issued by March 1, 2010 compared to CERs to be issued between March 1, 2010 and the end of year , ,000 KCERs by March 2010 KCERs from registered projects (from 2010 to 2012) 150, ,000 50,000 0 Solar HFCs Biomass energy Cement Biogas Fossil fuel switch Coal bed/mine methane N2O Landfill gas EE own generation Wind Hydro Reforestation Source: URC 2010a. The government of China has appointed several key CDM administrative institutions to supervise the CDM market. The National Leading Group on Climate Change (NLGCC) is responsible for formulating CDM policies and defining standards. It is the highest level committee that coordinates the National CDM Board where the Designated National Authority is located. The National CDM Board reviews and approves CDM projects and supervises CDM implementation. More recently, other institutions have been created to ensure efficiency and effectiveness throughout the CDM approval process. Chapter 2 analyses the roles and responsibilities of each agency. All other CDM market players, i.e., national and local agencies, international organizations, private sector, consultants, donor community, etc., are reviewed in Chapter 3. FIGURE 1.12 Provincial Distribution of Number of Registered CDM Projects Source: China CDM project management database. CDM IN CHINA 11

33 OVERVIEW OF THE GLOBAL AND CHINESE CDM MARKET FIGURE 1.13 Provincial Distribution of Currently Registered CDM Projects and Cumulative CERs Expected by kcers of registered 180, , , , ,000 80,000 60,000 40,000 20, kcers Number Guizhou Hubei Jiangsu Hebei Fujian Shanxi Henan Guangdong Guangxi Zhejiang Heilongjiang Liaoning Jiangxi Jilin Shaanxi Xinjiang Anhui Chongqing Ningxia Qinghai Beijing Hainan Tianjin Shanghai Yunnan Sichuan Inner Mongolia Hunan Gansu Shandong Number of registered projects Source: URC 2010a. 12 CDM IN CHINA

34 Implementation Framework of CDM Project Management and Management Institutions in China 2 The success of CDM in China is due to the government having established a sound institutional and regulatory system. In addition, complementary policy measures that promote sustainable development have helped generate opportunities for CDM development in China. CDM-RELATED NATIONAL CIRCUMSTANCES Recent economic growth in China has been strong. In 2009, total GDP exceeded US$ 4.9 trillion, 8.7 percent higher than in the previous year. However, compared to developed countries, the economic development level of China is still low, with GDP per capita only about onequarter of the world s average. Substantive disparities in economic development and urban and rural resident income exist in many regions of the country. Poverty reduction therefore remains an important challenge. The population of mainland China was 1.33 billion in 2009 (not including Hong Kong, Macao, and Taiwan), corresponding to one-fifth of the world s total. China s urbanization level remains below the world s average, with the urban population accounting for 46.6 percent of the national total. However, strong urban employment demand is resulting in large-scale rural-urban migration, leading to an urban population increase of more than 300 million people between 2005 and In addition to the pressures of a huge population and a growing economy, China is a country with vulnerable ecosystems. The national forest area in 2008 was 195 million hectares a coverage rate of just 20 percent. China s grassland area for the same year was 400 million hectares, most of which are high-cold prairie and desert steppe, while the temperate grasslands in northern China are on the verge of degradation and desertification due to drought and environmental deterioration. China, with a continental coastline extending over 18,000 kilometers and an adjacent sea area of 4.73 million square kilometers, as well as more than 6,500 islands, is potentially threatened by rising sea levels. Also, China s relatively harsh climatic conditions, with more drastic seasonal temperature variations than other areas at the same latitude such as North America and Western Europe, require more energy to maintain a relatively comfortable room temperature. ENERGY AND GHG EMISSIONS The growth of greenhouse gas emissions in China is driven by economic development, population growth, and energy consumption, as shown in the following equation: CDM IN CHINA 13

35 IMPLEMENTATION FRAMEWORK OF CDM PROJECT MANAGEMENT AND MANAGEMENT INSTITUTIONS Δ GHG emissions = population GDP population energy GHG GDP energy In this representation, GDP/population represents the level of economic development, energy/gdp represents energy intensity, and GHG/energy represents GHG emissions intensity of the energy mix. China s economic development has long been constrained by the scarcity of per capita resources and this is likely to continue. Economic development trends in many countries reveal a general positive correlation between per capita commercial energy consumption, per capita CO 2 emissions, and level of economic development although beyond a certain threshold some economies have managed some degree of decoupling. If China follows this traditional path of economic development, it will inevitably lead to growing energy demand and increased CO 2 emissions. The twin issues of energy security and GHG mitigation pose a challenge for China to create an innovative and sustainable development pattern. The energy intensity of the economy is largely a function of economic structure and the energy efficiency of supply-side and demandside technologies. The share of primary industry in the GDP declined steadily to 10.6 percent in 2009, with a corresponding increase in the tertiary sector to 42.6 percent, whereas the secondary sector, consisting mostly of manufacturing industries, has remained the dominant contributor to GDP, with a share of 46.8 percent (NBS China 2009). The Chinese government has been attentive to energy conservation and efficiency improvement, introducing policies and measures to reduce energy intensity. Figure 2.1 demonstrates that from 1990 to 2006 the energy intensity of China has continually decreased, despite remaining steady from In the 11th Five-Year Plan ( ), the Chinese government has set an overall target of a 20 percent decrease in energy intensity as well as implementing nationwide energy-saving and emission reduction projects and relevant public actions (see Annex 2 for details). Energy intensity decreased percent after the first 3 years of the 11th Five-Year Plan, but fell only 2.2 percent in 2009, short of the annual goal of 4 percent. During the first 4 years FIGURE 2.1 China s Energy Intensity per Year ( ) 6.00 Energy intensity (tce/10000 Yuan GDP) Source: NBS (2010) and the study team s own estimates. Note: The energy intensity data in this figure were estimated at 1990 prices. 14 CDM IN CHINA

36 IMPLEMENTATION FRAMEWORK OF CDM PROJECT MANAGEMENT AND MANAGEMENT INSTITUTIONS of the 11th Five-Year Plan, the accumulated decrease of energy intensity was percent. The central government has indicated that tremendous efforts are needed to meet the country s energy conservation target. 1 China s average efficiency levels are significantly below the world best practice levels, but there is increasing evidence of best practices being implemented as new industrial and power plants are built. Chinese best practice examples have been identified for various process configurations for supercritical power generation, iron and steel making, non-wood pulping, and coal gasifier-based ammonia plants (Worrell et al. 2007). Although new capacity increasingly uses best available technology, there is significant potential to reduce the average energy intensity of most sectors. Fuel mix is largely determined by national fossil fuel endowments, and China is heavily reliant on coal, the most carbon-intensive fossil fuel, to meet its energy needs (see Figure 2.2). Coal s carbon content per unit calorific value is 36 percent higher than oil and 61 percent higher than gas. 80 percent of China s electricity is produced by coalfired power plants. In 2009, the shares of coal, oil, and natural gas in final energy consumption accounted for 68.8, 17.5, and 3.8 percent, respectively, while other renewable energy accounted for 9.9 percent (NBS, 2009b). China faces challenges in decreasing its carbon intensity per unit of energy because (i) its energy mix adjustment is constrained by the mix of energy resources; (ii) its energy-efficiency improvement is subject to the availability of advanced technologies and financial resources; and (iii) its coal-dominated energy resources and consumption structure will not change substantially over the long term. China s historical GHG emissions are very low. According to the World Resource Institute Climate Analysis Indicators Tool cumulative emissions of CO 2 e of industrialized countries contributed 76 percent of the world s total between 1850 and Cumulative emissions per capita over this period are tco 2 e (USA), 1135 (UK), 963 (Germany), and 334 (Japan). In contrast, China s cumulative per capita emissions are only is 68.9 tco 2 e, or less than 10 percent of USA and Europe. Recently, however, with rapid economic development and continual improvement in living standards, China s GHG emissions have increased rapidly. According to IEA statistics (2009) annual CO 2 FIGURE 2.2 Chinese CO 2 Emissions by Fuel (left) and by Sector (right) Million tonnes of CO Coal/peat Oil Gas Million tonnes of CO Electricity and heat Manuf. ind. and construction Residential Other energy industries Transport Other Source: IEA CDM IN CHINA 15

37 IMPLEMENTATION FRAMEWORK OF CDM PROJECT MANAGEMENT AND MANAGEMENT INSTITUTIONS TABLE 2.1 emissions from fossil fuel combustions in China exceed the emissions from the USA, although per capita emissions in China are in the range of only percent of the USA. Official GHG emissions for 1994, along with estimates for 2004, published by the government (GOC 2004; NDRC 2007) show that during this period the annual average growth rate of GHG emissions was around 4 percent (Table 2.1). This is consistent with global trends (the Greenhouse Gas Emissions in China Emissions 1994 Emissions 2004 Gas (metric tons CO 2 e) (metric tons CO 2 e) Carbon dioxide Methane Nitrous oxide Gross emissions 4,060 6,100 Net emissions 3,650 5,600 Source: GOC (2004); NDRC (2007). FIGURE = Source: IEA 2009 Key Indicators of China s Emission Development CO 2 /TPES CO 2 /GDP CO 2 /capita Netherlands Environmental Assessment Agency 2009; Garnaut 2008). Despite steady social and economic development, China s emission intensity, defined as the CO 2 emission per unit of GDP, declined (see Figure 2.3). According to the IEA (2009), China s emission intensity fell to 2.31 kg CO 2 /US$ (constant 2000 US$) in 2007, from 4.01 kg CO 2 /US$ in 1990, a 42.3 percent decrease. For the same period, the emission intensity of the world average dropped only 14.6 percent, while the OECD countries level dropped 18.4 percent to 0.45 kg CO 2 /US$. In China, 204 million people still live below the World Bank poverty line of US$ 1.25 per person per day. Even though China has improved living standards for hundreds of millions of people over recent decades, it remains a lower middle income country with the largest poor population of any country in the world, except for India. Its continued economic development and population growth will continue to drive energy needs as well as both absolute and per capita emissions increases, despite its current low per capita emissions and overall decreasing energy intensity. RELEVANT MEASURES AND POLICIES FOR CDM PROJECTS IN CHINA The government of China has long recognized the importance of developing CDM projects. It established the Designated National Authority (DNA) for the management of CDM projects and issued the Interim Measures for Operation and Management of Clean Development Mechanism Projects in China on June 30, 2004, in accordance with the provisions of the UNFCCC ratified and approved by China. 2 The Measures were intended 2 Following consultation with the government of the Hong Kong Special Administrative Region (HKSAR), the central government notified the United Nations that the Convention and the Protocol were extended to the HKSAR effective May Under the Convention and the Protocol, HKSAR is required to work jointly with the mainland to fulfill the obligations of parties not included in Annex I to the Convention (non-annex I parties). 16 CDM IN CHINA

38 IMPLEMENTATION FRAMEWORK OF CDM PROJECT MANAGEMENT AND MANAGEMENT INSTITUTIONS to strengthen the management of CDM projects, protect China s rights and interests, and ensure the proper operation of CDM project activities. After one year of operation, the Measures took effect on October 12, 2005 (see Annex 1). CDM projects must be approved by the DNA. Project implementation institutes, however, are usually not governments and therefore transparency, high efficiency, and accountability are necessary. The Measures represents a cogent institutional roadmap for the efficient implementation of CDM projects in China. The CDM Measures contains five parts: (i) General Provisions; (ii) Permission Requirements; (iii) Institutional Arrangement for Project Management and Implementation; (iv) Project Procedures and; (v) Other Provisions. The detailed text for all 26 Articles is provided in Annex 1. The General Provisions state the formulation principles of the Measures and the definition of CDM in the Kyoto Protocol. They emphasize that CDM project implementation practices shall be transparent, highly efficient, and accountable. They also rule that CDM projects implemented in China shall be approved by NDRC and that priority is to be given to projects that promote: (i) energy efficiency improvement; (ii) development and use of new and renewable energy; and (iii) methane recovery and utilization. These priority areas are consistent with China s current status as a developing nation. The Permission Requirements provide detailed regulations on permission requirements for the development of CDM projects in China: CDM project activities shall be consistent with China s laws and regulations, sustainable development strategies and policies, and overall requirements for national economic and social development planning (see Annex 2), and should promote the transfer of environmentally sound technology to China. Implementation of CDM project activities shall conform to the requirements of the Convention, the Protocol, and relevant decisions of the Conference of the Parties. It shall not introduce any new obligation for China other than those under the Convention and the Protocol. Funding for CDM projects from developed country parties shall be in addition to their current official development assistance and financial obligations under the Convention. Only those CDM projects activities in accord with relevant international rules can be approved by the Chinese DNA. Article 11 of the CDM Measures holds that only Chinese-funded or Chinese-holding enterprises within the territory of China are eligible to conduct CDM projects with foreign partners. In such cases, the implementation unit shall submit to the DNA the project design document (PDD), a certificate of enterprise status, general information on the project, and a description of project financing. As the purpose of CDM projects is to facilitate sustainable development in developing countries, the required documents assist the relevant departments determine the qualifications of applicants. The Institutional Arrangement for Project Management and Implementation defines the project management system and project approval procedures for domestic CDM projects. These Arrangements describe the function of each level of the CDM management system, the obligations of the implementation institutes, and the details of the CDM project management system. The project owner (Chinese-funded or Chinese-holding enterprise) has a range of duties, including responsibility for construction of the project, and developing and implementing a project monitoring plan to ensure that the emission reductions are real, measurable, long term, and of added value. This requires the owner to contract designated operational entities to validate the proposed project activity and verify its emission reductions. The project owner would, on occasions, undertake CDM project negotiations with foreign partners. In addition, CDM IN CHINA 17

39 IMPLEMENTATION FRAMEWORK OF CDM PROJECT MANAGEMENT AND MANAGEMENT INSTITUTIONS the project owner would submit necessary information and monitoring records to NDRC for recording purposes, report to NDRC on CERs issued, and abide generally to the supervision of NDRC. The Project Procedures component specifies the application requirements and approval procedures for domestic projects, and stipulates the regulations and procedures for project implementation, supervision, and verification with reference to relevant international rules. The Other Provisions enumerate the revenue allocation ratios for CDM projects. While emission reduction resources are owned by the government of China and the emission reductions generated by a specific CDM project belong to the project owner, revenue from the transfer of CERs is owned jointly by the government and the project owner. The government receives a 65 percent CER transfer benefit from HFC and PFC projects, 30 percent from N 2 O projects, and 2 percent from projects in priority areas and forestation projects (see section 4.9 for details). These allocations reflect the national nature of the CERs derived from CDM projects, and the variations among project types conform to the country s sustainable development strategy. For priority projects, the government s lower (2 percent) revenue allocation facilitates development of these projects. The higher revenue collected from HFC and other project types has become the main source of funds for China s CDM Fund, and will be used to support climate change activities. KEY CDM ADMINISTRATIVE INSTITUTIONS According to the CDM Measures, the National Climate Change Coordination Committee (NCCCC) is responsible for: (i) formulating national CDM policies, rules, and standards; (ii) approving members of the National CDM Board; and (iii) reviewing other issues as necessary. In June 2007, the State Council established the National Leading Group on Climate Change (NLGCC), which replaced the NCCCC in policy making and coordinating CDM-related issues. Figure 2.4 shows the structure for CDM management. NDRC and the Ministry of Science and Technology (MOST) serve as co-chairs of the National CDM Board, and the Ministry of Foreign Affairs (MOFA) serves as the vice chair. Other board members are the Ministry of Environmental Protection (MOEP), the China Meteorological Administration, the Ministry of Finance, and the Ministry of Agriculture (MOA). The National CDM Board is responsible for providing expert review of CDM project activities as well as reporting to the NLGCC on the overall progress of CDM project activities. The National CDM Board is represented by related ministries with members holding a level of minister or vice minister. Under the direction of NCCCC, NDRC was appointed to host the Designated National Authority (DNA) for CDM as one of its competence centers. As China s DNA, NDRC assumes a number of responsibilities including accepting CDM project applications, approving CDM project activities jointly with MOST and MOFA, and issuing approval letters on behalf of the government. It also supervises the implementation of CDM project activities and establishes the CDM project management institute in consultation with other departments. The establishment of the National CDM Project Management Center in 2007 was a key step in building concrete technical support to the DNA. To promote the development of CDM and international cooperation on climate change, NDRC authorized its Energy Research Institute to establish the National CDM Project Management Center. The DNA, located within NDRC, allocates day-to-day duties to the CDM Project Management Center and supervises its operations. This center is charged with the following responsibilities, including 18 CDM IN CHINA

40 IMPLEMENTATION FRAMEWORK OF CDM PROJECT MANAGEMENT AND MANAGEMENT INSTITUTIONS FIGURE 2.4 CDM Management Structure National Leading Group on Climate Change (NLGCC) Headed by: Premier Wen Jiabao Members = 18 State Ministries Designated National Authority (DNA) NDRC National CDM Board Co-Chair: NDRC and MOST Vice-Chair: MFA National CDM Fund Board Chair: NDRC Vice-Chair: MOF Members: MFA, MOST, MOA, MOEP National CDM Project Management Center CDM Fund Management Center establishing a CDM project management database, providing CDM project development and management information, and recording CERs in the database; and monitoring and supervising the implementation of CDM projects. The CDM PMC also conducts capacity-building activities on CDM and provides management and technical consultation services, manages and coordinates the international cooperation implemented by the office of the NGLCC and, under the guidance of the office of the NLGCC, takes responsibility for managing CDM Fundsupported projects. The Center also undertakes research commissioned by the office of the NLGCC, manages and implements other international cooperation projects on climate change commissioned by other organizations and departments as well as organizing experts to review the CDM projects. The CDM Measures state that the government will collect a certain ratio of revenues to establish the National CDM Fund. The fund will be used to promote domestic CDM projects and related climate change mitigation and adaptation projects and activities. It will be managed by the National CDM Fund Board, consisting of members from NDRC (Chair), the Ministry of Finance (MOF Vice-Chair), MOFA, MOST, MOA, MOEP, and the China Meteorological Administration. A CDM Fund Management Center, established under MOF since 2007, to primarily assist with communication between participants and members, will be operated under the guidance of the CDM Fund Board. The regulations on revenue collection and use will be formulated by MOF with NDRC and other relevant departments. The CDM Fund Board will review the basic management system of the CDM Fund as well as project applications and significant CDM project activities and achievements. In addition, the Board will audit the annual financial budget and final accounting report of the CDM Fund. DOMESTIC APPROVAL PROCEDURE FOR CDM PROJECTS IN CHINA The CDM Measures stipulate detailed rules on CDM project approval procedures. (This section is supplemented by Annex 3, which provides CDM IN CHINA 19

41 IMPLEMENTATION FRAMEWORK OF CDM PROJECT MANAGEMENT AND MANAGEMENT INSTITUTIONS background on the general CDM project cycle.) The procedures in the Chinese Measures apply to CDM project activities, whether individual or bundled, but do not apply to CDM Programs of Activities (PoA s) authorized by the CDM Executive Board in June 2007, after the CDM Measures were issued. (To date, while the DNA has accepted PoA applications, it has not yet issued any LoA.) In the project development stage, project owners develop potential CDM projects, and complete a PDD. The EB has detailed regulations for the format and contents of PDDs to accommodate different types of CDM projects. The baseline methodologies adopted by a CDM project must be those approved by the EB, and the monitoring plan should be established according to the corresponding monitoring methodologies approved by the EB. The application process requires that institutions applying for CDM projects within the territory of China 3 should submit an application to NDRC with a prepared PDD and other application documents. Relevant administrative units and local governments can organize enterprises to apply. Application documents include an application letter for CDM projects, an administrative application form for CDM project activities and a CDM PDD. The application should contain an introduction of the project status and its financing, including general information about the project owner and foreign partner(s), a brief technical description of the project activity, total investment and project financing, technology process(es), estimated GHG emission reductions, economic and environmental benefits of the project, the approval status of the construction of the project, environmental impact assessment (if approved, copies of the approval certificate are required) and the current status of the project. NDRC invites relevant organizations to provide expert reviews of project applications. For CDM projects that have passed the preliminary approval process, the DNA will invite experts to review the project documents for each project. This review process, required within 30 days, includes: (a) methodologies used, including selection and use of the baseline methodologies and monitoring methodologies (including fixation of the baseline scenarios); (b) additionality demonstration; (c) calculation of emission reductions; and (d) monitoring plan. In addition, the experts will emphasize adherence to Chinese laws and regulations and alignment with relevant sectoral policies. They will also validate participant eligibility and obtain comments from stakeholders. The DNA arranges a monthly meeting of the National CDM Board to review all projects in the application phase. Based on the expert reviews, the Board will focus on the eligibility of the involved participants, the CDM PDDs, baseline methodologies and GHG emission reduction, the CER transaction prices, transaction conditions for capital and technologies, crediting period monitoring plan and expected sustainable development effects. The CDM Measures, especially Articles 5 to 9 (Annex 1), require the CDM Board to evaluate several additional facets of the project, including an examination of the environmental assessment reply letter and the feasibility report reply letter. These steps aim to determine: (i) eligibility and whether it will facilitate national sustainable development; (ii) eligibility in terms of construction; (iii) consistency with national laws, rules, and sustainable development strategies; (iv) conformity to the comprehensive requirements for the national economy and the social development plan; and (v) use of official development assistance (ODA) for financing. If con- 3 The application and approval procedures for CDM projects in HKSAR include many of the same steps and processes as on the mainland, as well as some exclusive to HKSAR. For more details see Annex CDM IN CHINA

42 IMPLEMENTATION FRAMEWORK OF CDM PROJECT MANAGEMENT AND MANAGEMENT INSTITUTIONS FIGURE 2.5 CDM Project Approval Procedures in China Non-rejection letter (if the buyer demands) 1 Project development 2 Submission of CDM Application to NDRC Maybe reconsidered subject to further improvement 3 Expert review 4 National CDM Board Meeting Letter of Rejection Reject 5 Decision making Reconsider 6 Approval Letter sensus is reached among all present members, the project is approved. According to the decision of the National CDM Board, NDRC and MOST will approve projects together while NDRC will work on the administrative procedure for issuing the Letter of Approval and inform the project participants. NDRC will make a decision on a project application within 20 days (excluding the expert review time) from the date of accepting the application. Those projects that receive the approval of the DNA can continue to the next application step. Those not approved by the DNA may also continue to the next step after incorporating amendments to their project documents recommended by the CDM Board. CDM IN CHINA 21

43

44 Analysis of the CDM Market in China 3 The government of China proactively supports the development of CDM as one means of implementing its obligations under the UNFCCC and Kyoto Protocol. CDM opportunities in China are attracting a growing number of foreign CER buyers, as well as domestic and international project developers. This chapter provides an analysis of the development of the CDM market in China according to different sectors, regulatory patterns and provincial distribution (sections ), key market players (sections ), the role of the World Bank (section 3.7), and examples of successful CDM projects (section 3.8). CDM PROJECTS IN CHINA Since 2004, when the Chinese government and the World Bank, together with German GTZ and the Swiss SECO, published the report CDM in China: Taking a Proactive and Sustainable Approach, China has undergone a remarkable transformation from an entry-level player in the global carbon market to domination of CDM supply. The report recommended that China (i) adopt a proactive and sustainable CDM policy; (ii) put in place the basic regulatory framework to facilitate CDM in China; (iii) ensure that critical CDM capacity is developed; and (iv) encourage CDM project identification and implementation. As described in the previous chapters and evidenced by the project data provided below these recommendations were fully embraced. There are now many types of CDM projects in China. The previous CDM in China report (World Bank 2004) estimated China s CDM potential measured by the number of CERs to be distributed across the economy as follows: electricity generation, 50 percent; steel and cement production, 10 percent each; non-co 2 projects (in particular, HFC-23 decomposition and methane capture), 10 percent; chemical industry, 5 percent; and other industries, 15 percent (see Figure 3.1). However, actual CDM development has varied markedly from the original expectation. The largest share of expected annual CERs of registered projects as of March 1, 2010 is expected to be generated from industrial processes (see Table 3.1). Table 3.1 shows 205 million CERs registered as of March 1, 2010, which is the estimated annual average of the 751 projects already registered. As mentioned in Section 1.3, based on assumptions made in PDDs, these 751 projects represent on paper a cumulative total of 962 million CERs by the end of However, actual issuances will be much less, perhaps only around 600 million CERs (for reasons cited in Section 1.3). As of March 1, 2010, 186 million CERs have been CDM IN CHINA 23

45 ANALYSIS OF THE CDM MARKET IN CHINA FIGURE 3.1 CDM Projects Registered in China According to Different Sectors Cement Renewable Energy EE Fossil Fuel Switch N 2 O Methane HFC A/R 2Q/2009 1Q/2009 4Q/2008 3Q/2008 2Q/2008 1Q/2008 4Q/2007 3Q/2007 2Q/2007 1Q/2007 4Q/2006 3Q/2006 2Q/2006 1Q/2006 4Q/2005 3Q/2005 2Q/2005 1Q/2010 4Q/2009 3Q/2009 Source: China CDM project management database. TABLE 3.1 Types of Registered CDM Projects in China Percentage of CERs/year Percentage of Project Type No. of Project Total Number (ktco 2 -e) Annual CERs Wind % 19, % Hydro % 39, % HFCs % 65, % Methane % 18, % Energy Efficiency % 16, % Afforestation & Reforestation 2 0.3% % N 2 O % 20, % Biomass % 2, % Fossil Switch % 20, % Produce Cement from Calcium Carbide 5 0.7% 1, % Solar 3 0.4% % Total % 204, % Source: China CDM project management database. 24 CDM IN CHINA

46 ANALYSIS OF THE CDM MARKET IN CHINA TABLE 3.2 Project Type of DNA-Approved CDM Projects in China Percentage of CERs/year Percentage of Project Type No. of Projects Total Number (ktco 2-e ) Annual CERs Produce Cement % 3, % from Calcium Carbide N 2 O % 16, % HFC % 66, % Wind % 57, % Methane Recovery & % 51, % Utilization Energy Efficiency % 72, % Fossil Fuel Switch % 29, % Biomass Energy % 19, % Hydro 1, % 125, % SF 6 Recovery & % % Utilization Solar 6 0.2% % Afforestation and 5 0.2% % Reforestation Transportation % % Total 2, % 443, % Source: China CDM project management database. issued, the large majority (77 percent) of which have been issued to HFC projects (see Figure 3.1). Of the 751 registered projects, 21 projects are registered as Gold Standard projects. CDM projects that are certified to the Gold Standard provide measurable and verifiable social and ecological co-benefits and reach a significantly higher price on carbon markets. Most of these 21 Gold Standard projects are wind projects. As the CDM is being further developed, new project types and technologies are introduced, new methodologies are proposed, and existing methodologies like ACM0002 (for renewable power generation) are revised. As a result, the breadth of project types has expanded over time. In China, while CDM projects are being developed in many sectors, the majority, as measured by the number of projects, are now in the field of renewable energy and energy efficiency. Estimations of annual CER production of hydro projects now account for 28 percent followed by other renewables (wind, biomass and solar) with 17 percent, and energy efficiency projects with 16 percent. Renewable energy projects constitute the majority of current CDM projects in China. A total of 1,665 renewable energy CDM projects have been approved by China s DNA, amounting to 69 percent of the total. The estimated annual emission reduction is 202,696 ktco 2 e, equal to 45.7 percent of the total expected annual emission reductions of approved projects. Hydropower and wind power are the two major types of renewable projects. As of March 1, 2010 a total of 1,105 CDM projects in CDM IN CHINA 25

47 ANALYSIS OF THE CDM MARKET IN CHINA hydropower had been approved corresponding to 45.8 percent of the total number. These are mostly run-of-the-river hydropower stations. As of the same date, a total of 451 wind power CDM projects had been approved, 18.7 percent of the total amount. Combined, the hydro and wind projects account for 183 million tco 2 e in estimated annual emission reductions, or 41.4 percent of the total expected annual emission reductions of approved projects. Two factors contribute to this situation. First, China is rich in water and wind resources, and these projects can be readily developed into CDM projects. The expected income of CERs for these types of CDM projects has spurred investment, and many enterprises have joined this sector. Second, methodologies for these CDM projects are straightforward. Until recently, their baseline and additionality were clearer than for other types of CDM projects, and most enterprises and consulting firms therefore selected hydro or wind projects as the starting point of their CDM business. However, recent developments in the ruling on the registration of renewable energy projects by the UNFCCC s CDM Executive Board appear to have made it more difficult for hydro and wind projects to demonstrate additionality in the context of national policies. This recent development has created some uncertainty in the market and a drop-off in new renewable energy projects. Energy-saving and -efficiency improvement projects constitute the second largest type of CDM projects approved in China in terms of number of projects. As of March 1, 2010, a total of 449 CDM projects of this type had been approved accounting for 18.6 percent of the total number of projects. The estimated annual emission reductions are 72,147 kt CO 2 e, corresponding to 16.3 percent of the total expected annual emission reductions of approved projects. The vast majority of these projects are heavy industrial waste heat and gas projects, in accordance with one of the 10 energy conservation programs included in the Medium- to Long-Term Plan for Energy Conservation (MLTPEC). However, in contrast, there has been little or no CDM activity in key end-use areas included in the MLTPEC such as electric motor systems, industrial process efficiency, building energy efficiency, or high-efficiency lighting, which are targeted for large energy savings. The following categories of CDM projects constitute the third largest group: (i) methane recovery and utilization; (ii) chemical industries; and (iii) other. Methane Recovery The CNCCP calls for methane emission reductions, including via CDM, of 200 Mt CO 2 e between 2006 and As of March 1, 2010, a total of 189 CDM projects of this type had been approved, 7.8 percent of the total number. The estimated annual emission reductions are 51,733 ktco 2 e/y corresponding to 11.7 percent of the total expected annual emission reduction of approved projects. Most of these projects are landfill methane capture. Then, the 11th Five-Year Plan for Development and Utilization of Coalbed Methane and Coal Mine Methane called for production of 5 billion m 3 each of surface-drained coalbed methane (CBM, with a utilization rate of 100 percent) and coal mine methane (CMM) drained underground (with a utilization rate of over 60 percent) in Major incentive policies were introduced, including exemption of fees, a price equivalence to natural gas, and preferential tax policies. After the Ministry of Environment Protection published the CBM/MM law in April 2008, 18 CBM/CMM projects have been registered. Four of these projects are from Shanxi Province with the remainder coming from six different provinces. Unfortunately, the registration of coal mine methane projects is progressing slowly. The complex technologies combined with regulatory environment (incentive schemes) issues have caused delays in the validation process by DOEs. 26 CDM IN CHINA

48 ANALYSIS OF THE CDM MARKET IN CHINA Chemical Industries Industrial greenhouse gases have high global warming potential, so although they are emitted in small quantities, they result in significant climate forcing. The CNCCP does not contain emission reduction targets for industrial gases, but it does promote CDM projects to control NO X, HFC, PFC, and SF 6 emissions. As of March 1, 2010, 11 HFC projects have been approved (all of which are registered and already issuing CERs) corresponding to 0.5 percent of the total number of DNA approved projects. However, in terms of CERs, these are the largest CDM projects in the world. Annual CERs are estimated to be as high as 66,798 ktco 2 e, or 15.1 percent of the expected annual total by 2012, and issued CERs constitute 77 percent of those issued to date. As per the same date, 28 N 2 O projects have been approved, with annual CERs reaching 16,039 ktco 2 e, 3.6 percent of the expected national total. Currently only one SF 6 project has received DNA approval with estimated annual CERs of 156 ktco 2 e. Other There are a few more sectors in which China has developed a small number of CDM projects, including afforestation/reforestation, transport, fossil fuel switching, and cement sector. A total of 70 approved projects fall into these categories, accounting for about 7.5 percent of annual CERs. Perhaps the most challenging of these is the forestry sector. The 11th Five-Year Plan calls for an increase in the forest coverage rate to 20 percent by As a result of these measures, including afforestation, the return of farmland to forest and grassland, and forest protection, the CNCCP expects the carbon sink to increase by 50 Mt CO 2 by 2010 from the 2005 level. However, as of now, only five afforestation and reforestation projects have been approved in China. The low price of CERs, the small number of cumulative CERs through 2012, and complicated methodology make it difficult to develop these activities into CDM projects. In addition, most of the forest farms are owned by the government, and are therefore ineligible to qualify as a project participant according to the domestic Chinese CDM Measures. The above profile of China s CDM projects demonstrates that China s recent CDM implementation is widely distributed across sectors, and is consistent with the guidance of the Chinese DNA. EVOLUTION OF CDM IMPLEMENTATION IN CHINA AND UNDERLYING FACTORS As shown in Chapter 1, China is the dominant country in the international CDM market. Transparent management policy, awarenessraising, and capacity development efforts, as well as the overall mitigation potential and associated scope for CDM in China, have all contributed to the rapid expansion of CDM development. It should also be noted that from the beginning of 2009, the numbers and expected CERs of DNA approved projects have tended to decline. This is mainly due to the fact that there are systemic delays throughout the registration, verification and issuance processes, there is no further potential for developing additional large HFC-23 projects, and there is an uncertain international post-2012 policy environment. The recent global financial crisis of the last 18 months has exacerbated this trend. Due to the characteristics of international and domestic procedures, there are inherent lags in the process, which begins with approval by the Chinese DNA, then continues with the required completion of the international validation and registration process, and ends with issuance of the first CERs from a project once it has been implemented and the resulting emission reductions are verified. Figure 3.2 illustrates the status of the DNA-approved Chinese projects as they move through this process. As of CDM IN CHINA 27

49 ANALYSIS OF THE CDM MARKET IN CHINA FIGURE 3.2 Status of DNA-Approved Chinese CDM Projects on March 1, Project number Estimated annual CERs mil. CERs Projects DNA Approved Registered Issued 0 Source: China CDM project management database. March 1, 2010, the Chinese DNA had approved 2,413 projects, of which 751 (31 percent) had been registered by the CDM EB, of which 206 have issued CERs. Figure 3.3 shows an overview of the duration of the validation period until projects reach registration for the global and the Chinese CDM pipeline as of March 1, It has been initially assumed that this period should take less than a year and this was the case until mid-2008 (URC 2010a). Analyzing the 751 registered Chinese CDM projects as of March 1, 2010, it can be observed that for 43 percent of the registered projects (320) this period took between 400 and 600 days. Only 170 projects (23 percent) remained in the validation period for less than a year, whereas the average duration is 504 days for the Chinese pipeline and 443 days for the global pipeline. Therefore, two conclusions are evident: first, that the global processing time of CDM projects is longer than was originally presumed; and second, that China projects take even longer than the world average (see Annex 3 for details on project cycle). As shown in Figure 3.3 the validation process (from start of the public comment period under validation) by DOEs and the registration process with the EB have been slower than expected both for the global as well as for the Chinese pipeline. The length of this period (which includes the process for submission of public comments) reduces the appeal of CDM project development, as the delay reduces the volume of CERs the project can generate by the end of Reasons for these delays are manifold. First, there is a limited number of eligible DOEs available processing more projects in the CDM pipeline as well as a limited number of DOE staff with knowledge of the Chinese language and CDM-related sectors in China. Second, the rapid growth in the number of projects submitted for validation creates a bottleneck both within the DOEs and the CDM EB. Fortunately, as the inflow rate of projects for validation has started to decrease since early 2009, and as the EB accredited two Chinese validators in March 2009, this bottleneck might diminish in the future. Third, the suspension of some key 28 CDM IN CHINA

50 ANALYSIS OF THE CDM MARKET IN CHINA FIGURE 3.3 Duration in Days from Start of Public Comment Period under Validation until Registration for the Global Pipeline and Chinese Pipeline Percentage Number of projects of Chinese pipline (%) Number of projects of global pipeline 0 < >1000 Days Source: URC 2010a validators, on which China was reliant, such as DNV, TUV-SÜD and SGS for some months during 2009, created further time lags. Fourth, methodological issues, relating to the additionality requirements of wind, hydro or methane projects, created further delay and correction loops regarding validation and registration. There was also increased regulatory scrutiny by UNFCCC and project submissions constrained by capacity gaps from the project developers/ DOEs leading to increased rejections and time lags in registration. However, reforms planned by the EB during 2010 such as the streamlining of procedures are expected to improve the situation. However, duration until first issuance is also influenced by project participants. For many project types e.g. renewables, an annual issuance cycle is chosen in cases where verification costs are high compared to CER revenues. On the other hand, HFC projects have shorter verification and issuance cycles, as the costs of verification are negligible compared to CER value. Therefore, HFC projects had much shorter durations until first issuance. Due to the rapid development of the global pipeline during the last two years (until March 1, 2010), the average performance rate across all types of CDM projects world wide (i.e. the comparison of CERs actually issued in the first year compared to estimated CERs in the PDD) is 83 percent (see Figure 3.5) while the average performance rate in China is marginally higher at 84 percent. China also has a higher share in the category of over-performing projects (i.e., issuances percent of the PDD) mainly due to well performing N 2 O and HFC projects, combined with a smaller share in very low performing projects (0-20 percent). In China 67 percent of projects already issuing CERs have a performance rate of between 60 and 120 percent, showing some sectoral patterns. Industrial gas projects (mainly HFC) show performance rates around 100 percent. Wind projects achieve an average of 87 percent, whereas hydropower projects show average issuance rates of 88 percent (the global average for hydro projects is 93 percent). Landfill gas projects remained at a low performance level of around 28 percent CDM IN CHINA 29

51 ANALYSIS OF THE CDM MARKET IN CHINA FIGURE 3.4 Average Duration in Days between Registration and First Issuance Registered global projects Registered Chinese projects Days Hydro Wind N 2 O EE Own Generation HFC Source: Calculation from data from URC 2010a as of March 1st, (below the global average of 45 percent), although this may be due to the methodological approaches used in the PDDs to estimate landfill gas yield which turned out to be overly optimistic. CDM AT THE PROVINCIAL LEVEL China demonstrates significant differences at the provincial level with respect to types of CDM opportunities (sectors, technologies), GHG mitigation and CDM potential, human and institutional capacity to identify and implement CDM activities, and the local sustainable development benefits resulting from CDM project activities. CDM projects are widely distributed across China: for example, only 7 provinces among China s 23 provinces have fewer than 10 registered CDM projects. (Tianjin, Taiwan and Tibet have no CDM projects.) Yunnan Province leads with 94, followed by Sichuan with 69, as of 1 March 2010 (see Figure 3.6). Analysis of the provincial status is based on China CDM project management database as of March 1, It is notable that Yunnan, Inner Mongolia, Hunan, and Gansu, poorer provinces on a per capita GDP basis, host among the largest numbers of CDM projects. In recent years, the geographical distribution of projects has shifted toward the southwest (Figure 3.7). There also is a general trend toward relatively fewer new projects in the wealthier provinces compared with projects already registered. This is consistent with the government s aim that CDM should contribute to local sustainable development, particularly in the poorer regions of the country. It may, however, also indicate that it is more challenging to demonstrate the additionality of CDM project activities with respect to normal business practices in provinces with better developed human and financial capacities. CER volumes, however, have a more uneven distribution that favors the eastern provinces (Figure 3.8). Eastern provinces that have hosted multiple large-scale industrial HFC destruction projects (Jiangsu, Zhejiang, Shandong) have 1 Differences in the number of registered projects may occur due to slightly different cut off dates between the RISOE pipeline (URC 2010a) and the Chinese CDM project management database. 30 CDM IN CHINA

52 ANALYSIS OF THE CDM MARKET IN CHINA FIGURE 3.5 Number of Global and Chinese Registered Projects (%) with Different Issuance Success Percentage Number of global projects (%) Number of Chinese projects (%) 0 0% 20% 20% 40% 40% 60% 60% 80% 80% 100% 100% 120% >120% Source: Calculation from data from URC 2010a as of March 1st, FIGURE 3.6 Provincial Distribution of Registered CDM Projects as of March 1, 2010, and Annual CERs Expected 35,000 30,000 25,000 20,000 15,000 10, Registered Annual CERs (ktco 2 e) Registered Project Numbers Qinghai Zhejiang Liaoning Heilongjiang Anhui Chongqing Jiangxi Shaanxi Jilin Xinjiang Ningxia Beijing Hainan Shanghai Yunnan Sichuan Inner Mongolia Gansu Hunan Shandong Hebei Guizhou Jiangsu Hubei Fujian Shanxi Henan Guangdong Guangxi Source: China CDM project management database. prospered more, whereas provinces that have hosted many small-scale renewable energy projects such as hydro projects in Gansu Province and wind power projects in Inner Mongolia have not benefited from high CER volumes and the resulting sales revenues (although other local sustainable development benefits are likely to accrue). Figure 3.8 indicates that as more recent CDM projects start getting registered and issuing CERs, there is likely to be a dramatic shift in the number of annual CERs away from the wealthy eastern provinces toward a more balanced distribution. This will be consistent with China s CDM priorities, moving from an CDM IN CHINA 31

53 ANALYSIS OF THE CDM MARKET IN CHINA FIGURE 3.7 Number of Projects Registered (left) and Those Approved by DNA as of March 1, 2010 Source: China CDM project management database. FIGURE 3.8 Annual CERs from Registered Projects by Province and Adherence to Chinese CDM Priorities for Registered Projects (left) and DNA-Approved Projects Source: China CDM project management database, as of March 1, CDM IN CHINA

54 ANALYSIS OF THE CDM MARKET IN CHINA industrial HFC-dominated CER portfolio toward one with more attention to renewable energy, energy efficiency, and methane projects located in the less developed regions. Of China s provinces and regions, Yunnan has the highest number of projects, with an emphasis on hydropower development. Inner Mongolia ranks third in terms of number of projects and is a leader in wind power development. Shanxi ranks fourth in terms of CERs and is a leader in coalbed methane development. Hubei has the tenth largest provincial CDM program in the country in terms of number of projects (81), of which 41 are hydropower, 26 are EE projects, and the other 14 are wind power, fossil fuel switching, biomass, and methane recovery and utilization. However, as outlined in Table 3.3, issuance of registered projects in these four provinces, both in relation to CERs issued nationwide as well as in terms of expected 2012 CERs to be generated according to PDD estimation. More specifically, by in CERs generated by March 1, 2010, hydro projects in Yunnan accounted for 13.3 percent; Inner Mongolia is leading on wind, having generated 28.1 percent while Shanxi accounted for more than 78 percent of CERs for coal bed mine and methane. For those interested in more information, case studies specific to these four provinces Yunnan, Inner Mongolia, Shanxi and Hubei are provided in part II of this report, before the annexes. This section is intended to provide a representative overview of provinces with different characteristics. The case studies give projectspecific details on current implementation status and achievements. CHINESE DOMESTIC CDM MARKET PLAYERS Project Entities Domestic and foreign entities, through their various functions, shape China s CDM market. This section offers a brief introduction to these participants and includes domestic entities, project owners, consultancies and Chinese DOEs. The development of the Chinese CDM market has been supported by targeted capacity building. It has also been aided by the organic pursuit of new business opportunities by Chinese enterprises that host CDM projects as well as market intermediaries that provide the technical, financial, and brokerage services that assist project owners in turning opportunities into CER revenues. CDM allows projectbased cooperation among private and public entities according to Article 12 of the Kyoto Protocol. China s CDM Measures state that only Chinese-funded or Chinese holding (jointventure) companies within the territory of China are eligible to conduct CDM projects with foreign buyers. This restriction limits the number of potential CDM project owners because wholly foreign-owned enterprises and equity joint ventures are excluded. In China, the owners of CDM projects can be broadly categorized as state-owned enterprises (SOEs), municipality enterprises (MEs), and private enterprises (PEs) (Figure 3.9). SOEs are administered by the state-owned Assets Supervision and Administration Commission of the State Council (SASAC); MEs are controlled and supervised by local governments; PEs are wholly owned or controlled by Chinese private capital. Two-thirds of all approved CDM projects are owned by MEs. Some large enterprises in the power sector have established internal CDM development groups and implemented a number of large projects. For example, Datang Corporation undertakes CDM project development with the help of its subsidiary, the China National Water Resources and Electric Power Material & Equipment Corporation Ltd. Currently, Datang Corporation has more than 80 CDM projects approved by DNA, most of which are wind power and hydropower projects. CDM IN CHINA 33

55 ANALYSIS OF THE CDM MARKET IN CHINA TABLE 3.3 Overview of Total CER Issuances According to Project Sectors and Selected Provinces, as of March 1, 2010 (in 000s CERs) Total KCERs Total kcers Subtotal Issued in in the Sector by Sector the Sector in in China Inner for Selected China as of Expected by Yunnan Mongolia Shanxi Hubei Provinces March 1, Hydro Wind EE Own Generation Landfill Gas N 2 O Coal Bedmine Methane Fossil Fuel Switch Biogas Cement Biomass Energy HFCs Solar Reforestation Subtotal by Provinces Source: URC 2010a. FIGURE 3.9 Type of Domestic Enterprises Hosting DNA-Approved Projects CDM project number share of domestic enterprises 5% 27% SoE ME PE 68% Source: China CDM project management database. Notes: SOE = state owned enterprises; ME = municipality enterprises; PE= private enterprises This graph was developed in CDM IN CHINA

56 ANALYSIS OF THE CDM MARKET IN CHINA The complex international and domestic procedures for implementing CDM projects from developing the project design (including baseline study, PDD preparation, and validation) through DNA approval, CDM Executive Board registration, project implementation and monitoring, and certification of the resulting emission reductions require technical, financial engineering, and managerial capacity. Pointcarbon (2008) reports that upfront investment costs are on the order of US$ 100,000 to develop and register a CDM project. Project management (typically, a team separate from project developers that manage a project and monitor data) is even more challenging because the concept of CDM is still unfamiliar for domestic enterprises. Managing and optimizing the benefits of CDM projects requires diligence and patience for project owners. Currently, nearly 50 consultancies are listed in the official government CDM Web site ( cdm.ccchina.gov.cn), while the real number of these entities in the China CDM market may be far higher. Initially, apart from foreign consulting agencies, only governmental organizations or academic institutions offered such services for domestic enterprises interested in CDM projects. With the rapid growth of this market, increasing numbers of domestic private consulting agencies are now involved. Domestic consultancies have been involved in nearly 75 percent of the approved projects by the China DNA (according to the information provided in PDDs). The rapid development of the CDM market in China since 2004 has attracted a growing number of consultancies providing services like consulting, PDD writing, and project application-filing for project owners (see Figure 3.10). Designated Operations Entities (DOEs) At the 46th meeting of the CDM EB on March 25, 2009, the China Environmental United Certification Center Co. (CEC) and China Quality Certification Center (CQC) received accreditation from the UNFCCC- CDM EB-AP, making them the first Chinese DOEs. Subsequently, other domestic entities have applied for DOE accreditation. This growing DOE capacity in China is an important development that should help ease the bottleneck created by a lack of sufficient DOE capacity to handle the large and growing number of Chinese CDM submissions. Emerging Carbon Exchanges There is a growing number of China Environment/Energy Exchange Centers. Although the Chinese regulator has not officially endorsed any of these environment/energy commodity exchanges for CER/VER/voluntary based transactions domestically, those exchange centers are pilot efforts to bring emissions trading to China. Their ultimate goal is to service the CER/VER market post-2012, or if a mandatory cap-andtrade system in China is introduced. Although clarity in market demand and supply is still lacking given the uncertainty of the post-2012 carbon market conditions, the effort of these exchanges is nonetheless commendable for their learning-by-doing approach and for developing a platform for policy dialogue with policy makers and with key stakeholders. The China Beijing Environmental Exchange (CBEEX) was established on August 5, 2008, with the approval of the Beijing municipal government. It is a professional market platform for trading various environment commodities including SO 2, COD and CO 2. The founding member includes China Beijing Equity Exchange (CBEX), The New Energy Investment Ltd. of China National Offshore Oil Corporation, China Guodian Corporation, and China Everbright Investment Management Corp. The advantage of this shareholding structure is that the two major energy companies can create demand/supply of carbon credit, while a commercial bank can help attract financing. CDM IN CHINA 35

57 ANALYSIS OF THE CDM MARKET IN CHINA FIGURE 3.10 Involvement of Domestic Private Sector Consultancies and Academic Institutes in DNA-Approved Projects CDM project number share of domestic consultancies 28% 72% Academic institutes Others Source: In December 2009, CBEEX launched the Panda Standard which set a domestic voluntary GHG offset standard. To qualify under this standard, emissions reduction/removal projects must comply with the following seven core principles of the Panda Standard: real; additional; measurable, reportable and verifiable; unique; permanent; able to demonstrate ancillary benefits; and unambiguously owned. In January 2010, BBEEX instigated a Carbon Neutral Alliance and issued a low-carbon credit card in partnership with Minsheng bank, which allows credit card owners to purchase voluntary carbon credit to reduce their carbon footprint. These moves are viewed as creating some degree of market demand for project-based voluntary carbon offset credits. It is not clear how many companies have joined the alliance. The Tianjing Climate Exchange (TCX) commenced in September 25, 2008 with registered capital of 100 million RMB. The main founding members are China Petroleum Chemical (CPNP) Asset Management Corporation (holding 53 percent equity), Tianjin Property Rights Exchange (holding 22 percent equity), and Chicago Climate Exchange (CCX) (with a 25 percent holding). It claimed to be China s first integrated exchange for trading environmental financial instruments. On February 9, 2010, TCX started the Tianjing Energy Intensity Exchange which is based on intensity targets for the building sector. The first contract was signed by three thermal-heat supply companies Tianjing Taida Cogen Company, Tianjin Jinhong Thermal Energy Construction Company and Tianjin Jinqiang Energy Conservation Company. These three companies will sell 11,500 tco 2 e to be achieved in the winter of 2010 through building energy efficiency projects, at a price of RMB 50/ton (equivalent to US$ 7.4/ton). The buyers are Russia Natural Gas Corporations and Citi Group. Tianjing Jinhe Building Efficiency and Certification Company will provide the verification services. Similar to the Chicago Climate Exchange, TCX also has a member-based voluntary carbon reduction program. More than 30 industrial companies have already signed up for this voluntary program covering steel, cement, power generation, and telecommunication sectors. However, the rules regarding how the voluntary target is set for members and also the method of 36 CDM IN CHINA

58 ANALYSIS OF THE CDM MARKET IN CHINA verification of the carbon reduction are both still under design. Shanghai Environment Exchange (SEE) is a wholly owned subsidiary of Shanghai Property Right Exchange with registered capital of RMB 50 million. SEE will provide carbon neutral services to the Shanghai World Expo FOREIGN PRIVATE SECTOR ACTORS Foreign actors in the Chinese CDM market fall into two categories: project actors, such as developers and advisors, and final CER buyers. This section looks at these the first of these two groups, and the next section looks at foreign CER buyers. The role of one major foreign partner in the CDM market the World Bank pans both functions, and is discussed separately in Section 3.7. The data for this section comes from 57 foreign private sector actors who have disclosed their information on the Web platform established by the China DNA. Two survey rounds were conducted in 2007 and 2010, through phone calls and questionnaires. The instrument used for the questionnaires is displayed in Annex 5. Business Environment for CDM Foreign Private Actors There are essentially two models for foreign buyers to use in developing CDM business in China. The first is to make use of an existing business line, such as equipment supply, to act as both CDM project developer and buyer, while the second is to establish strategic cooperation with a local CDM intermediary. 80 percent of survey participators indicated that they pursued the first approach, and had an already-established a branch in China. 30 percent had a branch office in a city other than Beijing or Shanghai. In these offices, Chinese staff have taken on the functions of CDM business development, project implementation, and local liaison, but the overseas headquarters remained in charge of decision making and quality control. Under the second approach, the definition of intermediary is very broad and includes not only consultant firms that have solid CDM knowledge in providing support from a technical perspective, but also some entities positioned to locate project resources and coordinate with industrial associations or quasi-governmental agencies at the local level. This approach has been widely pursued because it assists foreign companies overcome network, distance, and cultural constraints. The survey illustrates that the majority of foreign buyers would prefer to maintain long-term strategic relationships with the same intermediary or project entity with which they have had previous cooperation experience. All participants in the survey confirmed that they recognize many significant low-cost opportunities for emission reduction but that barriers prevent them from pursuing these options. Participants report, however, that they are confident that they will find sufficient potential to develop their project pipeline. Policy and Regulatory Environment for CDM Foreign Private Actors China s domestic regulation framework and procedure for CDM management (see Chapter 2) is highly regarded. The performance of China s DNA when compared with other DNAs in regulating the CDM market is ranked in the top three by survey participators. All survey participants said they were satisfied with the efficiency of the China DNA approval process, which enables every project to attend the national CDM Board meeting within one month of submitting the application package. Floor price and project ownership issues received the greatest attention from survey participants. Generally, the current floor price is consistent with the market trend, but could be altered to reflect the risk of a different type of project or CDM IN CHINA 37

59 ANALYSIS OF THE CDM MARKET IN CHINA ERPA arrangement. The ownership requirement becomes an obstacle to CDM implementation in some sectors. Finally, although the government has stated that Hong Kong companies are eligible to host Chinese CDM projects, respondents noted that clear regulations were lacking. 2 Some survey participants noted that they wished that the approval criteria for different types of projects could be disclosed in greater detail, and that the time required to issue a Letter of Approval could be shortened from the current 2-3 months after the national CDM board meeting. 20 percent of survey participants expressed their concern regarding the strongly competitive situation among buyers and referred to the example that competitive bidding procedures are increasingly being adopted by Chinese project owners. Although this development indicates that the market is becoming more mature, the result may be a price war among buyers. The uncertainty of the post-2012 climate certainly affects foreign companies business in China. Using a fixed price to purchase emission reductions after 2012 is rarely adopted in current commercial practice. However, some survey participants are confident that sales will continue to be made to the original buyer, if CERs can be generated after To avoid the risks of post-2012 uncertainty and maintain a project pipeline, a number of the leading foreign companies are becoming involved in project finance in addition to CER purchases. Project Environment for CDM Foreign Private Actors Through well-organized capacity-building activities, awareness of CDM among related local communities has been raised, although the survey also reflects that in some underdeveloped areas, like western China, there remains scope for improvement. In addition to general awareness of CDM opportunities, buyers also seek project counterparts with international experience a characteristic which greatly assists in conducting business. Half of the participants surveyed showed confidence in the implementation capacity of China s project entities, especially in those companies that had obtained international quality and management qualification. However project entities should be aware that CDM is not simply selling CERs, but is a performance-based business that requires significant and sustained operation and monitoring. For improved project performance and to increase the likelihood that the estimated CERs would be achieved, 30 survey participants became more involved in project technical design evaluation, even acting as the technical designer or provider. However, providing project finance in parallel to ER purchase is not common. For those buyers who do extend project finance, it is typically carefully controlled to amount to less than one year s CER revenue. During the implementation phase, foreign companies view various types of CDM projects as having different levels of complexity. Wind and hydro projects were unanimously viewed as the most straightforward, with HFC projects ranked second. By contrast, the implementation of energy-efficiency projects is considered as being obstructed by baseline data collection, financial additionality analysis, and monitoring. Landfill and coal mine methane (CMM) projects are also viewed as challenges in achieving better performance. N 2 O projects are less problematic than EE, landfill, and CMM projects, but require extraordinary support from the project entity to meet the extensive monitoring requirements of the methodology. 2 The government has since issued the Arrangements for the Implementation of Clean Development Mechanism Projects in the Hong Kong Special Administrative Region (June 6, 2008). 38 CDM IN CHINA

60 ANALYSIS OF THE CDM MARKET IN CHINA Challenges Emerged after Project Registration 3 All of the survey participants expressed the opinion that the duration between CDM registration and first CER issuance takes much longer than estimated, regardless of the type of CDM project. The reasons are: (i) as projects move from feasibility study to implementation, additional work on the PDD or on the monitoring plan may be required before CERs are issued; (ii) the financial crisis may have affected the project financing arrangement and therefore led to delays; and (iii) all of the DOEs are overloaded, and that constraint is compounded with the suspension of DOEs. The biomass sector in China, compared with other sectors, faces the most significant delays in the duration between registration and first ER issuance because of these reasons. FOREIGN CER BUYERS According to information provided by buyers in 751 project PDDs, the main countries that purchase the CERs generated by China s CDM projects are the UK, Netherlands, Japan, and Switzerland taking 21, 15, and 11 percent of total estimated CERs, respectively (see Table 3.4 ). However, one should take into account the fact that many major carbon trading companies have their headquarters in London or Zürich, and therefore the trader s country does not necessarily correspond with the end buyer s country. THE WORLD BANK S ROLE IN CHINA S CDM MARKET The World Bank was a major pioneer among all agencies involved in developing the Chinese CDM market. Not only have World Bank carbon funds purchased about 141 million CERs, the World Bank helped create the CDM market with capacity building, information, methodology development, and large, early interventions. In addition, the World Bank supported the creation of the CDM Fund (see section 4.9), and TABLE 3.4 Distribution of the 751 Registered CDM Projects by CER Buyers Buyers Number of CDM Amount of kcers Projects Purchased UK ,143 Netherlands ,461 Austria 24 3,189 Italy 23 38,890 Spain 16 20,943 Canada 6 33,301 Japan ,592 Sweden 99 27,390 Switzerland ,761 Unilateral* Germany 51 24,678 Denmark 7 19,372 France 6 19,920 Finland 4 19,202 Norway 3 19,162 Ireland 1 7,865 Portugal Luxemburg 1 76 Belgium 4 19,272 Total 922** 591,219*** *Nine projects are unilateral projects. **Some projects have more than one buyer; for example, Yangquan Coal Mine Methane Utilization for Power Generation Project has two buyers, Italy and Spain, therefore the total number is greater than the actual projects registered. This explains why the total number of buyers exceeds 751. *** Also for these reasons, the allocation of purchased CERs of the same project between,multiple buyers is difficult. But as a result, the total CERs is an approximation of the actual annual registered CERs (204,842.65kCERs). 3 Based on survey conducted in 2010 CDM IN CHINA 39

61 ANALYSIS OF THE CDM MARKET IN CHINA has supported an ongoing stream of capacity building activities up to the present. Going back to 2001, the World Bank was active before most other buyers and donors. The World Bank s strategic engagement in China s carbon mitigation market began in late 2001, at the same time it was launching its carbon finance business worldwide with the commissioning of the 2004 study, Clean Development Mechanism in China: Taking a Proactive and Sustainable Approach. This landmark study revealed the enormous mitigation potential in different economic sectors in China and recommended various measures (legislation, capacity building, institutional development) to realize that potential. As a follow up, the World Bank provided capacity-building support through its Carbon Finance Assist (CF-Assist) program, initially in the formulation of the CDM legislation including the final amendments in That legislation provided the foundation for China to become the leading CDM nation within three years. CF-Assist also facilitated participation of the Chinese stakeholders at the annual Carbon Expos since This enabled them to have direct contact with carbon buyers and other market players, thus increasing the exposure to Chinese CDM projects. Starting in 2005, using its various carbon funds, the World Bank has developed 18 CDM projects, with a total emission reduction capacity of 141 million tons of CO 2 e over their lifetime (see Table 3.5). Prominent initial projects, developed jointly with the Ministry of Environment and aiming at eliminating HFC-23 industrial gas, helped create liquidity in the CDM market worldwide. Meanwhile, the World Bank s carbon finance work in China expanded in various sectors such as household level biogas, renewable energies and landfill projects. A pioneering outcome of the HFC projects developed by the World Bank in China was the establishment of the CDM Fund which is being fed from a specific share of CER revenues, aimed at promoting programs and activities that directly contribute to sustainable development. The World Bank provided important support in preparing the appropriate legal documentation, and continues to support further steps in institutionalizing the CDM Fund. With the Kyoto Protocol drawing to a close by 2012, new priorities and targets are emerging in using mitigation to address climate change, and the World Bank is also preparing to continue its leading role. A key aspect will be to accelerate the scaling up of mitigation activities from the current project-to-project approach of CDM to large-scale programs. The Carbon Partnership Facility (CPF), the new financial mechanism launched by the World Bank, is the only CDM fund currently offering to purchase CERs beyond 2012 and is extending its period to This Facility is aimed at developing large-scale GHG mitigation activities and the promotion of clean technologies. SUCCESSFUL CDM PROJECTS This final section draws lessons from previous sections to review what factors make for successful CDM projects. Lessons learned from past experience can be of value to future project developers. The China DNA approval procedure is intended to facilitate high-quality project proposals that meet the requirements for successful registration by the CDM EB. Project documents that do not meet the Chinese approval criteria are returned to project owners for improvement to allow them to be eventually approved by the National CDM Board. Table 3.6 provides an overview. Project Selection and Available Methodology The rapid development of CDM in China has attracted domestic enterprises of different scales and different industries. However, successful Chinese CDM projects operate in relatively focused areas, and project owners should 40 CDM IN CHINA

62 ANALYSIS OF THE CDM MARKET IN CHINA TABLE 3.5 Overview of World Bank CDM Projects in China Total CER Year of LoA Contracted from China Date of CDM Year of First Project Name (tons) Annual CER DNA registration ER Issuance A. Registered 1 Guangdong Huizhou Combined Cycle Gas Turbine Thermal Power Project 4,390,000 1,000, April pending 2 HFC-23 Destruction 113,092,086 18,840, June 2007 May 3 Nanjing (NISCO) Steel Converter Gas Recovery and Utilization for Power Generation Project 1,293, , Dec pending 4 Jincheng Coal-bed Methane 8,050,000 3,000, April pending 5 Xiaogushan Hydropower 3,000, , Aug 2007 Aug 6 Baotou Steel Coke Dry Quenching 900, , Nov pending 7 Guangrun Hydropower Expected Development 485,000 75, April Dec Pearl River Watershed Management 462,014 25, Nov 2007 May 9 Tianjin Shuangkou Landfill Gas Recovery and Electricity Generation 635, , Aug pending 10 Yunnan Whitewaters Hydropower Development Project (GYHDP) 2,200, , April 2010 March 11 Hubei Eco-farming Biogas 380,000 58, Feb pending 12 Shandong Poultry Manure Biogas 465,000 66, April pending SUBTOTAL 135,352,595 24,107,344 B. Signed ERPAs 13 Huitengxile Expected Expected Dec Wind Farm 1,600, , Dec Meishan Coke Expected Expected Dry Quenching 750, , Dec Guangxi Phase II Expected pending Reforestation Project 340,000 87, Aug Shihutang Hydro Project 200, , Liaoning District Heating Project, Yingkou EDZ 860, ,000 pending 18 Luojing COREX Project 1,852, ,532 pending SUBTOTAL 5,602,662 1,674,532 TOTAL 140,955,257 25,781,876 Registered ERPA signed but not registered yet CDM IN CHINA 41

63 ANALYSIS OF THE CDM MARKET IN CHINA develop projects within the framework constructed by previous domestic successful CDM projects and adopt approved methodologies to avoid unnecessary delay. Project owners and consultancies should pay attention especially to the priority areas defined by the Measures. As problems emerge during CDM project implementation, methodologies get updated. Both HFC-23 and N 2 O have extremely limited direct contribution to domestic sustainable development yet have large GHG emission reductions. Such projects face high risks when requesting registration. Potential CDM project participants should continually follow the EB s relative activities and adjust the type and scale of CDM projects accordingly. Projects that make a real contribution to domestic sustainable development are accorded higher priority. Internal Teams, Consultancies and Buyers Selection China does not require that consultants working on CDM be certified. It is the job of project entities to select consultants that are appropriate for specific projects. Similarly, buyer selection is a crucial part of a CDM project application, because an appropriate selection helps guarantee CERs revenue for project owners when verified. Project owners should be cautious when selecting consultancies and buyers in order to guarantee successful approval and registration, and consultation with NDRC or local DRCs is recommended. Participating in relevant capacitybuilding activities to acquire a full understanding of CDM policies is also a useful approach. An alternative to hiring consultants is for large enterprises with several CDM projects to create their own CDM project development teams. This may bring advantages like cost savings, time savings, and technical precision with regard to specific methodologies. Project owners are responsible for project monitoring and reporting to the DOE, and the owners team has an important role in data collection and monitoring during project implementation. 42 CDM IN CHINA

64 ANALYSIS OF THE CDM MARKET IN CHINA TABLE 3.6 Characteristic of Successful CDM Projects Criterion Do Don t Project Selection CDM Consultant Selection Project Preparation DOE Selection Risk Management Financing Other Developers should target projects for which approved methodologies are available. Government should support new methodology development in priority areas. Project owners should investigate the past development experiences (project numbers and areas) of consultants for potential cooperation. Project owners can consult with DNA when they are not certain about the capability of certain consultants. Potential project owners should investigate CDM actively (joining capacity-building activities, consulting with consultancies of good reputation, reviewing the CDM Web site, etc.) to decide whether or not to develop CDM projects. Owners should consult with professional institutes before negotiating with potential buyers. Owners should submit to DNA the following documents: CDM PDD, certificate of enterprise status, general information of the project, and a description of the project financing. Project participants should check the project areas and efficiency of certain DOE. Once decided, PP is suggested to negotiate with DOE in timely fashion to guarantee validation and/or verification procedure. Developers should not develop projects that have no available approved methodology unless new methodology accompanied by proposed projects will be sent to methodology panel to be reviewed. Project owners should not totally rely on consultants without investigation by themselves. Project participants should not disobey national CDM policies and also should not omit other basic CDM rules, like additionality, pre-study. Once the projects are under validation/verification, project participants should not refuse necessary requirements by DOE. CDM IN CHINA 43

65

66 Impacts of CDM Implementation 4 By engaging with the CDM, China has both helped developed countries decrease their emission reduction costs and created local sustainable development benefits. This chapter investigates the relationship between CDM implementation and China s sustainable development. CDM CONTRIBUTION TOWARD NATIONAL TARGETS The priority areas for CDM project implementation in China are: energy-efficiency improvement, development and use of new and renewable energy, and methane recovery and use. Of China s 751 registered CDM projects 92 percent are in priority areas. Specifically, 75 percent involve new and renewable energy projects (370 in hydropower, 165 in wind power, 16 in biomass-based power and 3 in solar); 7 percent involve coal mine gas and methane recovery and use projects (including landfill gas recovery and utilization); and 10 percent involve EE improvement projects (73 in total). The distribution indicates that CDM development is consistent with China s policy aims. However, in terms of estimated CERs by 2012, those generated from registered projects that comprise priority areas constitute only 43 percent of the national total. Although the share of non-priority project types remains high with regard to expected 2012 kcers, especially of HFC and N 2 O proj-ects, the share is decreasing with time. 1 To promote the development of projects in priority areas and carbon finance flows to these areas, the government of China is promoting relevant incentive measures, capacity building, and differentiated taxation of CERs. This has contributed to a steady broadening of the CDM market from non-carbon industrial processes to multiple market areas offering direct reduction of carbon emissions, primarily in the energy sector. The result of this steady development in adding CO 2 abatement-related projects, particularly from the energy sector, is shown below in Figure 4.1. Since March 2009, CDM projects in the priority areas have not only dominated the number of projects entering the pipeline, they have also overtaken HFC projects with regard to the amount of projected CERs by In terms of CERs issued as of March 1, 2010, non-priority sectors constitute over 80 percent of the total, but this share is expected to decline to around 55 percent by the end of 2012 (see Table 1.1). CDM IN CHINA 45

67 IMPACTS OF CDM IMPLEMENTATION FIGURE 4.1 Difference in Registered Projects between March 2009 and March kcers 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 Difference in 2012 kcers March 2009 March 2010 Difference in numbers March 2009 March Number of projects registered 0 Hydro Wind EE own generation Landfill gas N 2 O HFCs Biomass energy Fossil fuel switch Coal bed/mine methane Reforestation Solar Cement Biogas (new methane avoidance) 0 Source: URC 2009b and 2010a. Note: Project types in priority areas are highlighted in light green. TABLE 4.1 Targets of CNCCP in the Renewable Energy Sector Capacity Renewable Goal CNCCP Renewable Energy Technology 2005 Energy Law Law 2020 Wind power GW 6.0 GW 20,000 MW Solar energy 0.07 GW 0.3 GW 60 Mt CO 2 1,000 MW Biomass 2.0 GW 5.5 GW 30 Mt CO 2 20,000 MW Small hydropower 43.8 GW 53.0 GW 500 Mt CO 2 31,000 MW Note: Implied annual loads for the 2010 reduction levels are 2,100 hours for solar, 3,000 for wind, 3,500 for biomass, and 5,000 for small hydro; the utilized emissions factor is tco 2 /MWh. CONTRIBUTION OF CDM IMPLEMENTATION TO CHINA S NCCP China s National Climate Change Programme (CNCCP) which aims to achieve significant reductions in the greenhouse gas emissions, includes two important energy sector targets one in renewables, and one in energy efficiency. China s priority CDM sectors contribute to these CNCCP targets. One target, as per China s Renewable Energy Law, is to boost China s renewable energy capacity to 16 percent by the end of The law s capacity expansion target for 2010 and 2020 is shown in Table 4.1, together with the CO 2 abate- 46 CDM IN CHINA

68 IMPACTS OF CDM IMPLEMENTATION TABLE 4.2 China s Emission Reduction Targets and CDM Contribution by 2010 CNCCP Estimated CDM Pipelined Expected CDM Goal Issued CERs by Contribution CERs Contribution to End of 2010 to target by end 2012 Target (%) by (Mt CO 2 ) (Mt CO 2 e) of 2010 (%) (Mt CO 2 e) End of Key Energy Conservation Programs Hydropower Coal-bed and -mine methane Advanced thermal power generation Other renewable energy (wind, solar) Biomass energy Total Source: URC 2008a, 2009a,b and 2010a Note: CERs issued as of 1st of March 2010 by projects from priority areas correspond with 15 percent of total issued CERs. In terms of expected 2012 CERs, projects from priority areas account for 43 percent. FIGURE 4.2 Stock Taking and Projection of Cumulated Issued CERs by 2010 According to the Sectors under the CNCCP Projected Issued kcers 50,000 40,000 30,000 20,000 10,000 Biomass energy Other renewable energy (wind, solar) Coal-bed and-mine methane Hydropower 10 Key energy conservation programs 0 End of 2006 End of 2007 End of 2008 End of 2009 End of 2010 Source: URC 2006b, 2007a, 2009a/b and 2010a/b Note: CERs issued as of March 1, 2010 by projects from priority areas correspond with 15 percent of total issued CERs as of March 1, In terms of expected 2012 CERs, projects from priority areas account to 43 percent. ment goal for 2010 specified in the NCCP. The only significant contribution to this goal by the CDM has been in the area of wind projects, accounting for around 26 percent of the national goal in 2010, followed by biomass energy with 4.4 percent (see Table 4.2 and Figure 4.2). Separately, the government set a goal in the area of energy efficiency to reduce energy intensity per unit of GDP by 20 percent between 2006 and 2010, leading to emissions savings of 550 million tons of CO 2 reductions during the 11th Five-Year Plan period. However, CDM CDM IN CHINA 47

69 IMPACTS OF CDM IMPLEMENTATION activities have had a minimal impact in energy efficiency (only 2.4 percent), including in the main areas of concern, such as coal-fired power generation, energy-intensive industry (other than waste heat reduction in steel and cement production), and buildings and transportation efficiency (Arquit Niederberger, 2008). In other areas, contributions from coalbed and coalmine methane projects are achieving only two percent of the CNCCP reduction goal for But there will be a gradually growing contribution to the goals of advanced thermal power generation (such as from ultra-supercritical coal projects), sink enhancement, and end-use energy efficiency. It remains unanswered whether CDM can play a more significant role in China s transition to an efficient and low-carbon economy. Certainly, the contribution of CDM to priority sectors can be expected to grow, since CERs are issued over a multi-year crediting period, and also as more projects are registered. The last column in Table 4.3 shows a more substantive contribution of CDM CERs on the national renewable and energy efficiency targets by the end of 2012, but this dramatic scale-up remains to be proven. REDUCING KYOTO COMPLIANCE COST FOR DEVELOPED COUNTRIES Due to differences in the economic structure and technological level of developed and developing countries, the marginal abatement costs of GHG emission reduction also differ significantly (Wetzelaer et al. 2007). Before CDM implementation, many studies simulated the role of the carbon markets in reducing implementation costs of developed countries (World Bank, 2003). In the absence of actual project information and data, most of these studies established the average marginal abatement cost curve of different countries through a variety of approaches. The World Bank (2004) reviewed and compared the simulation results of such research on China s CDM market potential. Building on this analysis, Can Wang et al. (2008) further simulated the contribution of China s CDM market to cost of emissions reductions as paid by developed countries (see Figure 4.3). The results showed that, in the absence of China s CDM market, the average implementation costs of Japan, Western Europe, and other OECD countries during the Kyoto Protocol first commitment period would be 37, 34, and 24 percent higher, respectively, than under the current carbon market scenario. Anger (2007), using a more micro-economic approach to estimate mitigation cost functions, reached a conclusion similar to that of Can Wang. If no CERs were supplied from projects in China, it may be reasonable to expect that Annex I countries would increase their purchases of other developing countries CERs or of transitional economy countries hot air, or would have to enhance their domestic emission reduction actions. However, this contention is not supported by all researchers. According to Enkvist et al. (2007), substantial scope remains for low-cost GHG reductions in industrialized countries, mainly in energy-efficiency improvement. However, top-down studies such as those summarized in Heggedal and Kverndokk (2007) find positive marginal abatement costs of reaching the Kyoto commitments. For the EU, studies quote a wide range between 26 and 49 EUR, but highlight uncertainties depending on the models. It is also shown that the availability of surplus AAUs from countries in transition can lead to a price collapse if these countries are willing to sell at a low price. Therefore, calculating the average cost of EU allowances as the benefit from CDM is a very optimistic assumption. The benefit would be much lower if hot air is sold at lower prices. Instead, the short-term benefit of CDM is limited to the price level at which countries with hot air would be willing to sell. Eventually, the ratio at which hot air reaches the market largely determines the real environmental benefit from CDM implementation. Given that hot air can be banked, the major 48 CDM IN CHINA

70 IMPACTS OF CDM IMPLEMENTATION benefit of the CDM accrues by extending the availability of hot air into the future by increasing the overall emission budgets of Annex I countries. Thus, the CDM allows industrialized countries with a low willingness to pay to fulfill their commitments at low cost. A conservative analysis assumes that the average cost for Annex I countries taking additional domestic measures would be equal to the current price of EU allowances (and the assumption is conservative since that price has presumably been drawn downwards by the availability of CERs). The price of secondary CERs was 12 euro as of March 1, 2010 (Point Carbon 2010b), while the March 1, 2010 EU allowance (EAU) traded at 13 euro/tco 2 e (Point Carbon 2010b). Given this scenario, the estimation by Can Wang et. al for Annex B countries to benefit from China s CDM implementation in the region of $1.8 bn appears to be a plausible order of magnitude. China benefits from the revenues generated by the CDM while simultaneously helping the industrialized parties to the Kyoto Protocol limit their compliance cost. PROMOTING SUSTAINABLE DEVELOPMENT OF CHINA Article 6 of the CDM Measures clearly states that CDM project activities shall be consistent with China s laws and regulations, sustainable development strategies and policies, and the overall requirements for national economic and social development planning. The emphasis on developing these priority areas is not only because of their great potential, but also because of their benefits to sustainable development. CDM projects can promote the sustainable development of host countries in various ways, such as CER revenue, technology transfer, energy savings, energy mix improvement, climate capital, environment improvement, and employment increase. Both qualitative and quantitative indicators can be used to measure FIGURE Without China s CDM With China s CDM Japan Other Annex I Russia Western Europe Eastern Europe Source: Can Wang et al. (2008). Annex I Countries Cost under Different Assumptions the direct and indirect contribution of CDM projects in promoting sustainable development. For the purpose of this study, some indicators have been defined. Quantifiable indicators like (i) technology transfer; (ii) energy saving and energy conservation; and (iii) green investments are easier to measure because there is detailed information in the PDDs (Table 4.3). Due to the variety of structures of CDM projects, it is more effective to use a sector-specific indicator, such as hydropower or waste heat recovery. Other contributions to sustainable development, such as skill training opportunities for staff and the impacts on resource degradation and poverty reduction, are also important, but the results are difficult to measure and to control. As a result, there are few specific data provided in the PDDs regarding these indicators. The next three sections deal with each of these issues: Section 4.5 deals with technology CDM IN CHINA 49

71 IMPACTS OF CDM IMPLEMENTATION TABLE 4.3 Indicators for Assessment of Environmental and Sustainable Development Benefits Indicator Source of Verification 1 Contribution to Technology PDD Transfer and Improvement 2 Energy Saving PDD, national energy statistics on installed capacity of hydro, wind, biomass power generation 3 Contribution to Leveraging PDD, 5 year plan Green Investment transfer; Section 4.6 with Energy Conservation; and Section 4.7 with establishing a green investment climate. TECHNOLOGY TRANSFER According to the UNFCCC, 2 technology transfer (TT) is defined as a broad set of processes covering the flows of know-how, experience, and equipment. CDM-driven TT should be environmentally sound and support sustainable development. While TT is a secondary objective of CDM, for developing countries, in addition to receiving CER revenues, it is important to obtain advanced technologies in energy saving and clean energy. CDM can contribute to TT by financing emission reduction projects using technologies currently not available in host countries. The government of China specifies in the Measures for Operation and Management of Clean Development Mechanism Projects that CDM project activities should promote the transfer of environmentally sound technology to China. A number of recent international studies have investigated the contribution of CDM to TT, analyzing the information provided in PDDs (Seres 2007; Dechezleprête et al. 2007). These studies report that TT is claimed for about 40 percent of CDM projects investigated, and for more than 60 percent of the CER potential of the investigated sample of projects. This indicates that TT is more common in larger projects, which makes sense since the level of TT is closely related to economic scale and the characteristics of project owners. Large enterprises in areas of advanced economic development, access to information, and an efficient policy environment have a relatively high level of TT. Onsite investigation indicates that SOEs pay more attention to TT than PEs during negotiation of CDM projects. A more critical view was proposed, however, by a Chinese Energy Research Institute (ERI) in-depth investigation on TT of China CDM projects. ERI analyzed the PDDs of the first 208 China CDM projects registered before May 2008, and surveyed 18 EU enterprises and 10 provincial CDM service centers. From this sampling analysis, it concluded that the definition of TT is not clear in the Convention or Protocol, and that PDDs provide different descriptions and explanations of TT. It also found that the CDM frequently did not achieve the goal of helping developing countries get advanced technology through CDM. First, ERI ascertained from reviewing PDDs that fewer than 40 percent of projects even mentioned TT. Second, even for those projects that specifically claimed TT, this was limited to equipment purchases in about two-thirds of the projects. Finally, the remaining one-third that claimed to 2 UNFCCC 2007; Findings of CDM technology transfer report ( index.html). 50 CDM IN CHINA

72 IMPACTS OF CDM IMPLEMENTATION FIGURE 4.4 Distribution of CDM Projects with Technology Transfer Energy industry/ electricity Chemical industry Waste heat recovery & landfill Iron & steel Source: PDDs of registered projects, UNFCCC CDM website. Note: Some projects are listed as belonging to different sectors simultaneously. For instance, almost all the waste heat recovery and landfill projects are also shown in the energy/electricity generation sector. have had know-how training actually received simple O&M training. Key knowledge and techniques were rarely introduced, let alone the transfer of manufacturing technology. The types of projects that claimed TT are mainly non-co 2 emission reduction projects, like N 2 O, HFC-23 and CMM. All the HFC-23 decomposition projects and 35 (out of 61) energy efficiency projects offered TT. Others with a TT component were in landfill gas power generation, biomass power generation, and waste heat power generation (Figure 4.4). The EU, United States, and Japan are major countries exporting technology and equipment to China in CDM activities, primarily for renewable energy, especially wind power and biomass. Examples include: Gamesa G58 wind turbine TT from the UK in the Jilin Changling Wind Farm Project; wind turbine and O&M TT from Gamesa Eolica Co. Ltd. of Spain and Vestas Co. Ltd of Denmark, respectively, in the Ningxia Helan Mountain wind power project; and superheated steam decomposition facilities, neutralizer, waste gas, and water disposal equipment transferred from the JMD Greenhouse-Gas Reduction Co. Ltd. of Japan in the Zhejiang Juhua HFC-23 Decomposition Project. Overall, it is clear that CDM projects show relatively small amounts of TT for at least four main reasons. First, because CDM project development is a market-based activity. In many cases foreign buyers are interested only in CERs and project owners also may only need the support of CERs revenue. For both sides, technical cooperation is often not the highest priority during project development. Second, time is limited for project owners and buyers. The first commitment period defined by the Kyoto Protocol is The protocol was not valid until 2005, but TT is invariably a lengthy process. Therefore, projects without TT content are developed first because of their relatively short development period. Third, most registered CDM projects are renewable energy projects, with medium or small hydropower and wind power projects accounting for the largest share. During the past few years, these technologies have experienced rapid development with increasing numbers of turbines and generators being produced domestically. As a result, strong CDM IN CHINA 51

73 IMPACTS OF CDM IMPLEMENTATION domestic demand created domestic gains far beyond the CDM sector. Fourth, current CDM regulations (both domestic and international) have not provided sufficient policy incentives and enhanced funding support for TT. Barriers to TT as reported by market observers in China (WWF et al. 2008) include the 50 percent local ownership threshold that limits incentives for foreign capital investments in advanced power generation technologies. This restriction may limit CDM investment, as wholly foreignowned enterprises (WFOEs) are often the preferred model for foreign investors from a risk-mitigation perspective. It has been reported that this restriction is resulting in a number of projects not being developed, as many investors are unwilling to cede control of a project to an unknown or inexperienced domestic partner. Ultimately, this provision may therefore favor the development of unilateral CDM and discourage the transfer of advanced technology (Arquit Niederberger 2006). Similarly, some of the major GHGemitting enterprises in China are in natural resources (oil, metals) and natural monopoly sectors (electricity) that offer only restricted access to foreign investors (Niederberger 2006). Appropriate modification, such as the reconsideration of the foreign ownership clause, could contribute to more TT-friendly future CDM regulations, thereby enhancing sustainable development in China. ENERGY CONSERVATION In the 1980s, China s government established the principle of laying equal stress on developing and energy saving, while giving priority to saving at the current stage. Since then, China has made significant progress in energy conservation as a result of: implementation of its Law on Energy Conservation and other related regulations; establishment of an energy conservation plan; establishment and implementation of vigorous policies on energy conservation technology, economics, finance, and management; establishment and implementation of energy efficiency standards and labels; encouragement of energy conservation technology research, development, demonstration, and dissemination; introduction of advanced energy conservation technology; establishment and implementation of new energy conservation mechanisms; and strengthening of policies and measures for energy conservation key projects. All these efforts have contributed to decreasing energy intensity. The CDM is part of this drive. Of the 751 registered CDM projects, 73 (10 percent) are energy-saving and energy-efficiency improvement projects. These 73 waste heat and gas recovery projects are all either supply-side efficiency or waste heat/gas recovery projects rather than end-use (demand-side) energy efficiency projects. Current projects are expected to reduce industrial electricity demand by approximately 15,200 GWh annually, equivalent to the annual output of ten 300 MW coal-fired power plants (operating 5,000 hours per year). This figure can be considered relative to China s total installed thermal capacity of about 550 GW (in 2007), or total industrial electricity demand of 18 million GWh in Table 4.4 lists the first 20 projects in this field. The main reason for the low total impact of energy saving and efficiency CDM projects is the lack of viable applicable methodologies. Many energy-saving technologies require significant methodology development and this makes them more difficult to implement than renewable energy sources projects, especially with regard to applicable baselines, calculations of emission reduction, additionality, and project boundaries. In addition, most projects generate a small and 3 Source: China Energy Statistical Yearbook CDM IN CHINA

74 IMPACTS OF CDM IMPLEMENTATION TABLE 4.4 The First 20 Projects in Energy-Saving and -Efficiency Improvement Province Project Name Annual Saving (GWh) Gansu Gansu Qilianshan Cement 6000kW Waste Heat Recovery Project 35.7 GWh Hainan 6.5MW WHR Project in Huasheng Tianya Cement Co., Ltd GWh Anhui Ningguo Cement Plant 9100KW Waste Heat Recovery and Utilization for Power Generation Project 65.1 GWh Shandong Taishan Cement Works Waste Heat Recovery and Utilization for Power Generation Project 89.5 GWh Shandong BOG and COG Utilization for Combined Cycle Power CDM Project in Jinan Iron & Steel Works GWh Hebei Installation of waste heat recovery system in a coking plant in Qian an City GWh Hainan 8MW pure low temperature waste heat recovery (WHR) for power generation in SDIC Hainan Cement Co., Ltd 52.7 GWh Chongqing Fueling Waste Heat Recovery for power generation project GWh Inner Mongolia Baotou Iron & Steel Blast Furnace Gas Combined Cycle Power Plant Project GWh Beijing BBMG Cement WHR for 10.5 MW power generation project in Beijing 72.2 GWh Jiangsu Power Generation by Waste Heat Recovery Project in Henglai Building Materials Co. Ltd GWh Hubei Hubei Quzhai Cement 9000kW Waste Heat Recovery Project 58.5 GWh Hubei Yichang Yihua Waste Heat Recovery and Utilization project 84.1 GWh Inner Mongolia Baotou Iron & Steel Coke Dry Quenching and Waste Heat Utilization for Electricity Generation Project GWh Hebei Waste gases utilization for Combined Cycle Power Plant in Handan Iron & Steel Group Co., Ltd GWh Jiangsu Waste Gas based Captive power Plant in Liangang Group GWh Hebei 30 MW WHR Project of Hongshi Group GWh Hunan Waste heat power generation project at Hunan Anshi XingYuan Power Generation Co., Ltd GWh Shanxi Power Generation (20MW) by utilizing Coke Oven Gas of China Coal and Coke Jiuxin Limited in Lingshi, Shanxi 68.8 GWh Shanxi 24MW Power Generation from Coking Waste Heat Generated in the Clean-type Heat-recovery Coke Ovens at Shanxi Sinochem Wonder Industries Co. Ltd GWh uncertain number of CERs. Another deterrent is that emission reductions from energy-saving projects is closely related to energy production, which fluctuates, leading to significant uncertainty about CERs. Finally, energy-saving projects are usually medium-size or small projects, and in some cases their revenues cannot cover their costs. When this happens, project owners, developers, and buyers are reluctant to implement them. Nonetheless, in the number of energy-saving and energy-efficiency improvement CDM projects has increased dramatically recently. China has great potential in these types of projects because of its national efficiency improvement targets. The situation remains, however, that there are no demand-side efficiency projects approved. Arquit Niederberger (2008) provides a thorough review of the barriers to end-use efficiency projects under CDM. The future of such projects is in question, as the CDM EB is considering enhanced barrier analysis for highly profitable projects, such as waste-heat and gas projects. CDM IN CHINA 53

75 IMPACTS OF CDM IMPLEMENTATION In September 2007, the 34th meeting of the EB, held in Bonn, Germany, approved a consolidated methodology for new grid connected fossil fuel fired power plants using a less GHG intensive technology (ACM00013). The approval of this ultra-supercritical power methodology allowed the development of this type of CDM project in China. Through March 2010, the China DNA has approved twelve ultra-supercritical CDM projects. 4 As of early 2010, only China, Brazil, India and Iran have Ultra-Supercritical power projects in the pipeline, while only India has one registered. The reasons for the lack of registered projects in China may lay in the complexity and comprehensive data requirements of the methodology ACM00013 and/or in technical project delays with this novel technology. CLIMATE INVESTMENT As discussed in Section 3.3, a major strategy of the Chinese government s engagement in CDM has been to promote the development of CDM projects in the less economically developed areas of the country. Average investment by different type, CERs and region has been reviewed for the first 202 projects registered before April Investment distribution for the total 751 registered projects has been estimated based on this information. The distribution of CDM investment (as taken from the project PDDs) is shown in Table 4.5 and Figure 4.5. Figure 4.5 shows that the eastern regions aggregate is 28 percent of the total investment, whereas the central regions aggregate is 32 percent and the western region is 40 percent. This distribution is slightly different from the regional distribution of registered CDM projects as outlined in Chapter 3. The estimated CDM investment by province, compared with the per capita GDP by province, is shown in Figure 4.6. The result shows no statistically significant correlation. Total investments in the less developed central and western parts of China are about US$ 10.4 billion, about 69 percent of total investments. Currently, the distribution among regions does not provide clear evidence for a significant CDM contribution toward poverty alleviation. In summary, the priority areas of new and renewable sources, methane recovery, and energysavings and energy-efficiency improvements cover 80 percent of the total investment (Figure 4.7). Non-priority areas account for 20 percent. 5 Furthermore, with implementation of its CDM program, less developed areas of China will gain around US$ 1.5 billion on CER revenues. Finally, up to US$ 2 billion of CDM revenues will be transferred to the CDM Fund, which is intended to be a progressive mechanism that will further benefit both the priority areas and the western provinces (see Section 4.9). CDM CAPACITY BUILDING Since 2000, a number of capacity-building activities have been implemented with support from the World Bank, the Asian Development Bank (ADB), the Global Environment Facility (GEF), the United Nations Foundation (UNF), and bilateral donors. The projects have been carried 4 They are Jiangsu Guodian Taizhou Ultra-Supercritical Power Project; Anhui Huadian Wuhu first phase Ultra-Supercritical Power Project; Zhejiang Guodian Beilun Ultra-Supercritical Power Project; Shandong Zouxian Ultra-Supercritical Coalfired Power Project; Shanghai Wai Gaoqiao Ultra-Supercritical Coal-fired Power Project; Zhejiang Guohua Ninghai Ultra-Supercritical Power Project; Tianjin Beijiang Power Plant Project; Huanneng Yuhuan Ultra-Supercritical Coal-Fired Power Project; Guangdong Pinghai first phase Ultra-Supercritical Power Project; Henan Yuzhou second phase Ultra-Supercritical Power Project; Datang Xinyang Huayu second phase Ultra-Supercritical Power Project; and Anhui Wanneng Tongling Ultra-Supercritical Power Project. 5 Note: Without the two large-scale HFC-23 decomposition projects of the World Bank, the share of nonpriority area investment would only account for 16.3 percent of the total investment. 54 CDM IN CHINA

76 IMPACTS OF CDM IMPLEMENTATION FIGURE 4.5 Regional Distributions of Green Investment 37% 31% Central Region Eastern Region Western Region 32% Source: PDDs of registered projects, URC2008a. Note: The World Bank committed US$ 930 million in two HFC-23 projects in Jiangsu Province, and as a result the allocation of the total invested money might be distorted. Without these two projects, the share of the Eastern Region is 27 percent of the total. FIGURE 4.6 Low Correlation of CDM Investment and Per Capita Income of the Recipient Province CDM investment (bil. US$) y = 3E 06x R 2 = GDP (RMB per capita) Sources: 2009 GDP per capita data by province (National Bureau of Statistics); CDM investment by province (information in PDDs from UNFCCC CDM website). out to strengthen the country s capabilities in methodological research, economic assessment, institutional arrangement, project development and operation. (See Annex 4 for an overview of past and current major programs). These efforts have built expertise in CDM project management and policy making, and the research institutes involved have enhanced their capacities for research and development of CDM activities through these programs. CDM IN CHINA 55

77 IMPACTS OF CDM IMPLEMENTATION FIGURE 4.7 N2O decomposition 0% 3% 1% Distribution of Number of CDM Projects with Green Investment 11% 17% 68% New & renewable sources Methane recovery & utilization Energy saving & efficiency improvement HFC-23 decomposition Fuel switch Source: PDDs of registered projects, UNFCCC CDM website. Fully Utilizing the Promotion Function of the Government Government sectors have sufficient resources for capacity building and public awareness building. The central government promotes climate change awareness among all government officials and decision makers in enterprises and institutions, with the aim of building strong awareness of global climate change. For example, NDRC and MOST have signed Memorandums of Understanding (MOUs) on CDM cooperation with the governments of France, Denmark, Austria, Canada, and Australia, and have implemented successful projects. About 27 local CDM centers have been established with central government support and they also have successfully developed CDM projects. In the next phase, local governments should have sufficient capacity to be able to substantively promote public awareness of and disseminate information on climate change and CDM. Publications and Training on Climate Change and CDM The government s focus has been to use both mass media books, newspapers, periodicals, audio, and video and thematic training workshops on climate change science and CDM, to reach relevant stakeholders. Dissemination efforts have also included expanding the functionality of the government s climate change and CDM Web sites so that they become effective platforms for information dissemination and communication. Currently, the government has organized more than 50 official CDM training workshops throughout China, and has issued 6 official information books or manuals on CDM. The official CDM Web site ( is maintained and improved by information and communication specialists, who play a critical role in this important effort. Encouraging Public Participation Several efforts are or have been under way to engage more people and institutions in CDM and climate change efforts. These include: Incentive mechanisms to encourage public and enterprise participation. The CDM web site for all interested parties, including buyers, sellers, consultant companies, and the general public. An open database on CDM projects to provide inquiries and information retrieval services for users. In 2006, the Asian Carbon Expo was held in Beijing, attracting thousands of participants from a variety of disciplines. Reinforcing International Cooperation and Communication The government of China supports increasing international cooperation in promoting public awareness of climate change issues and CDM. Through bilateral and multilateral cooperation, 56 CDM IN CHINA

78 IMPACTS OF CDM IMPLEMENTATION much needed examples of international good practice can be gathered and cited to improve domestic practices. This work will be expanded in the years to come. Meanwhile, the government is paying increased attention to south-south cooperation on CDM. Seminars for Asian and African officials on CDM capacity building were held in November 2007, April 2008 and May 2009, covering many issues that CDM project developers should be aware of during project development, and sharing China s experience with CDM project development and management. These capacity-building activities can effectively increase CDM implementation capacity in other developing countries. The south-south exchange held in May 2009 took place in Hubei Province and was jointly organized by the World Bank and the Hubei Province CDM Center. 24 representatives from 16 countries in Sub-Saharan Africa, East and Central Asia, Middle East and North Africa attended the program. The main lessons learned were: Governmental support and institutional framework at different levels in China: The most important lesson learned is that governmental support in China is delivered in a more coordinated and effective way than in many other countries, including financial support, legal and institutional guidelines and capacity building. The process-oriented structure of CDM development in China generated significant interest with entities such as the CDM Centers, a National CDM Board and a National CDM Fund, all playing complementary roles in advancing the CDM market. The establishment of such solid regulatory frameworks, related institutions and structures were perceived as being a significant step toward scaling up development of a high quality CDM portfolio. Capacity building: Participants were impressed with the capacity China has built at all levels. They acknowledged that successful capacity building (also within DNAs) is one of the main preconditions for successful CDM project development in host countries. Financial support: Participants acknowledged that financial support for CDM project development and access to underlying project finance are crucial to accelerate CDM development. Commitments and partnerships: The strong commitment from companies and local governments (for example to implement similar projects on household levels) can accelerate the build-up of a CDM market. Future south-south cooperation will focus on expanding developing countries involvement in CDM activities; promoting cooperative exchange of scientific and technological know-how in development and management; and encouraging the international community to support efforts by developing countries to address the challenges of CDM, such as lack of technology transfer. In addition to government-level cooperation, the exchange of CDM expertise and experience among research institutions and universities in developing countries is encouraged. General and Common Content CDM capacity-building aids usually include a general introduction to climate change issues, the UNFCCC and Kyoto Protocol, basic information regarding CDM modalities and rules, and activities in the country to date. Several capacitybuilding entities have also developed a printed CDM manual. The problem with such material is that it becomes obsolete quickly even if users are not aware. A web-based manual would be far preferable: it could be constantly updated and could be shared by different capacity-building initiatives. While a web-based manual may cost more than a one-off printed guide, the benefits would be significantly higher. The current web site, would be a good platform to use in gathering and distributing the web-based manuals produced by different activities. CDM IN CHINA 57

79 IMPACTS OF CDM IMPLEMENTATION Donor Collaboration Many donors have supported CDM capacitybuilding activities in China. To avoid seeing the same project objectives and output supported by different donors, and to allocate resources more efficiently, the DNA or the Office of NLGCC could nationally coordinate overall capacitybuilding activities to allow donors to pool their resources and clearly separate tasks. CHINA CLEAN DEVELOPMENT MECHANISM FUND China s CDM Measures, issued in 2005 (see section 2.3), stipulate that According to the pertinent articles of Measures for Operation and Management of Clean Development Mechanism Projects, the Government of China will levy a certain proportion of the certified emission reductions (CERs) transfer benefits from CDM projects, and the revenue collected upon CERs transfer benefits from CDM projects will be used to establish the Clean Development Mechanism Fund to support the country s activities on climate change such as climate change related science and technology research, and raising national adaptation and mitigation capacity. The establishment of the Clean Development Mechanism Fund will also play an active role in relieving the pressure of demand for fund in response to climate change, and guaranteeing the effective implementation of this national program. In August 2006, the State Council approved the establishment of the Clean Development Mechanism Fund (CDMF) and its Management Center, which are now operational. As approved by the State Council, the CDMF is a policy- and development-oriented, nonprofit, long-term, open-ended, state-owned fund. Its mandate is to support and promote domestic activities that address climate change, under the guidance of national sustainable development strategies. The World Bank and the Asian Development Bank provided active technical and capacity-building support to the CDMF to commence its initial operations. The CDMF is independently operated, and is financed from levies on China s CDM revenues. Decree 37 introduced tiered levies on the CER revenues generated by various CDM projects, with higher levies on CDM projects with higher CER value but lower development impact: 65 percent from HFC/PFC projects 30 percent from nitrous oxide projects 2 percent from all other projects (EE, RE, CMM/CBM, small scale reforestation) The current CDMF balance is approximately US$ 750 million, and is projected to increase to US$ 2 billion by the end of The Board of the CDMF and the CDMF Management Center are at the core of the organization s structure. The Board is an intergovernmental coordinating institution for CDMF affairs, composed of the National Development and Reform Commission, Ministry of Finance, Ministry of Foreign Affairs, Ministry of Science and Technology, Ministry of Agriculture, Ministry of Environmental Protection, and China Meteorological Administration. The CDMF Management Center is the legal management entity of the CDMF for implementation of business operations, and is responsible for raising and collecting funds for and managing and use of those funds. The CDMF Management Center runs the business of the CDMF under the guidance of the Board. Financial Resources and Use of the China CDM Fund The main financial resource of the CDMF is China s share of the proceeds from international cooperation on CDM projects, in accordance with the CDM Measures (see above). The three other sources of revenue of the CDMF are: (i) donations from domestic and foreign institutions, organizations, and indi- 58 CDM IN CHINA

80 IMPACTS OF CDM IMPLEMENTATION viduals; (ii) CDMF investment earnings from interest of bank deposits and national debts; and (iii) other financial resources approved by the State Council of China. To facilitate implementation of NCCP, the CDMF will offer a combination of grants, concession loans, and other financial tools through various instruments, including project-based cooperation. Through these, it will support capacity building, public awareness, and concrete activities on mitigation and adaptation. For example, the CDMF Management Center provided technical assistance for preparation of the first national adaptation action project, Mainstreaming Adaptation to Climate Change into Water Resources Management and Rural Development, on which the Chinese government, the World Bank, and the Global Environment Facility have been working closely since May The CDMF will also support the creation of innovative new resources and mechanisms to address climate change. Though there are high expectations for the CDMF, it must be realized that the CDMF is only a small part of China s climate change financing needs. Rather, the CDMF is simply a new partner joining other international and domestic sources of financing and sponsorship. To date, the CDMF has not started to make investments with its accumulated capital. In preparation for doing so, it has established cooperative relationships with domestic, bilateral, and multilateral institutions, including the World Bank Group (IBRD, IFC), ADB, and international and domestic private sector institutions. The CDMF will consider project cofinancing with the World Bank and others, and initial efforts are under preparation. CDM Fund Support to China s CDM Activities One of the CDMF s business priorities is to support the development and implementation of CDM projects, through three approaches: The CDMF will, as a bridge and platform, facilitate and organize cooperation between buyers and sellers of CDM CERs. The involvement of the CDMF is designed to lower the risk of transactions and to promote better regulated CDM project transactions. The CDMF will enhance the role of CDM projects as useful instruments providing economic incentives for mitigation. The CDMF will, through concessional loans and other financial tools such as accessing non-grants through the commercial banking system, support a wide range of development and implementation of CDM and mitigation projects. Facilities that address market risks faced by some CER suppliers may be considered. These could complement instruments strengthening participation of Chinese enterprises in CDM implementation. Moreover, investment instruments targeted at selected key areas of CDM and mitigation are established and functional under the CDMF. With these instruments and facilities, the CDMF can work with partners to provide financing and co-financing for various approaches to the development and implementation of CDM projects. Through grants and technical assistance, the CDMF will support capacity-building and public awareness activities required for CDM progress in China. Support may include: Enhancing CDM management capability in related national agencies Improving the capacity of domestic technical and consulting institutions, business and financial sectors, in participating in CDM projects Developing methodologies for CDM projects Helping domestic enterprises better understand and use CDM international regulations Encouraging domestic institutions to apply for DOEs Identifying and recommending potential CDM projects in China CDM IN CHINA 59

81 IMPACTS OF CDM IMPLEMENTATION Providing necessary policy and technical guidance for domestic enterprises to develop cooperation with international buyers Facilitating the efforts of domestic enterprises to improve their capabilities relevant to developing and implementing CDM projects and to CER transactions Tracking and analyzing the development of the international carbon market Providing necessary and timely international policy guidance to domestic enterprises to help them capture future opportunities. Moreover, the CDMF may organize and facilitate consulting services for developing and implementing CDM projects, for instance with respect to project identification, PDD development, the design of construction projects that form the basis of CDM projects, and CER monitoring during CDM project implementation. 60 CDM IN CHINA

82 Challenges and Opportunities 5 As a developing country party to the Kyoto Protocol, China attaches great importance to its obligations under the Kyoto Protocol and has been promoting the development of the CDM through the establishment of related institutions, promulgation of a regulatory framework, targeted scientific research, and overall capacity building at both central and local levels. Since 2005, China has increasingly used the CDM mechanism in a win-win fashion to help it meet its fundamental development goals, such as energy efficiency, and to accomplish more than simple emissions reduction. Despite these important achievements, challenges also remain that, if addressed, would better enable the CDM to continue to contribute to China s development. Opportunities to expand the CDM beyond its current level are also expanding: new technologies like carbon capture and storage, new programmatic approaches such as the Program of Activities (PoA) approach, and new sectors being brought into the CDM market such as buildings and transportation, could play a major role in the development of the CDM market, particularly after This chapter presents a list of brief suggestions to overcome these challenges and catch new opportunities that the market is creating. ACHIEVEMENTS CDM Regulatory and Administrative Framework Since it embarked on CDM development, China has promulgated a number of regulations in order to define the legal basis for its CDM operations. The institutions assigned to administer the development and operation of CDM are located in critical central government departments, including the National Development and Reform Commission (NDRC), the Ministry of Finance (MoF) and the Ministry of Science and Technology (MoST). 1 This centrality has contributed substantively to China s extensive CDM portfolio development over the last 5 years. The DNA (Designated National Authority) plays an important role in regulating the Chinese CDM market by guiding CDM project development. After promulgation of the Measures, the DNA published regulations regarding the documents required for CDM project application and their formats, and designed a detailed review procedure. The DNA also identified priority areas for CDM project development, and differentiated CDM income sharing on CERs according to each project s contribution to sustainable development. While some rules of the Interim 1 As described in Section 2.3, the Interim Measures for Operation and Management of Clean Development Mechanism Projects in China (the Measures ) specified that the NDRC, an inter-ministerial body above the ministry level, would be the administrative body for CDM project activities. CDM IN CHINA 61

83 CHALLENGES AND OPPORTUNITIES Measures of July 2004 were not fully clear to CDM stakeholders, the final version of the Measures published in 2005 contained many clarifications that contributed to the drastic expansion of the Chinese CDM market in action. These regulations provide a solid basis for the implementation of CDM projects in China institutionally and systematically. Nevertheless, international CDM project developers have noted that some rules, such as requiring majority Chinese ownership and the capping of consultancy fees, do not exist in other CDM host countries and thus may hinder some project development in China. The setting of a floor price, below which no Chinese CDM project developer can sell CERs, has also generated lively discussion, especially as the floor price is not officially published, but communicated informally. Nevertheless, the Chinese regulatory regime helps ensure that a sufficiently high share of CDM benefits accrue to Chinese project participants. One may also argue that these rules are fully transparent. Growing Awareness of Climate Change and CDM Opportunities The Chinese government sees an important role for awareness-raising in promoting CDM project development. Government departments are capable of mobilizing advanced resources such as senior experts to conduct capacity building and raise public awareness. They have effectively enhanced public awareness of climate change, and CDM in particular, through mass media, publication of books and manuals, and articles in newspapers and magazines. It has also organized thematic training seminars and workshops on CDM subjects by targeting different audiences and by establishing an official China CDM website ( which provides information in both Chinese and English and is regularly updated by an assigned professional team. It serves as a communication platform for all interested parties, including buyers, sellers, consultant companies, and the general public. A database on CDM projects has been established by the CDM Project Management Center to provide inquiries and information retrieval services for users. Development of Chinese and Other Developing Country Capacity The significant expansion of China s CDM project portfolio over the past few years has been accelerated by the awareness-raising strategies outlined above, deepened by comprehensive CDM capacity building activities. Many donors from developed countries, such as the World Bank, Asian Development Bank, Global Environment Facility, United Nations Development Programme, and bilateral partners, acted as project partners. The main activities included technical assistance on CDM methodology, economic assessment of CDM, institutional arrangements for CDM management, and CDM project development and operation. For example, the publication of baseline emission factors for China s regional electric power grids by NDRC helped reduce the costs and efforts required of CDM project owners, project development agencies, and DOEs when drafting, reviewing, and validating PDDs. Overall, these capacity building activities have improved the government s CDM project administration capabilities and those of project proponents as well. Beijing-based institutions, such as the National CDM Project Management Institute, Tsinghua University and the Chinese Academy of Social Sciences have played an active role in developing a centralized CDM project information system, implementing capacity-building activities, providing management and technical consultation, and undertaking CDM-related policy research. Moreover, both central government and provincial government institutions supported the setup of provincial CDM centers, which were crucial in providing support for 62 CDM IN CHINA

84 CHALLENGES AND OPPORTUNITIES project development in form of capacity building workshops and direct development of CDM documentation. Today, there are well functioning CDM centers in most Chinese provinces. Local governments have also helped raise public awareness of the need to combat climate change and the role of CDM projects. Finally, the private sector itself rapidly understood the potential benefits of CDM projects and successfully built its own critical level of capacity. The parties to the Kyoto Protocol have recognized that there are barriers to the equitable regional distribution of CDM project activities, so China helps promote CDM development through south-south cooperation. CDM study tours have been organized by the Chinese Ministry of Commerce (MoC) and NDRC, also in cooperation with donors. Officials working on CDM from African, Asian and other developing countries have visited sites and partners in China. These training and dissemination efforts will be increasingly relevant, as it is likely that post-2012, the CDM will focus more on the poorest developing countries. Steps to Ensure Sustainable Development Benefits From the outset of CDM development in China, the government has emphasized the need to bring the mechanism to the economically less developed parts of the country. This target has generally been achieved, and with it positive job creation not only in the stronger economic regions along the east coast, but also in the less economically developed parts in the central and western part of the country. At the end of April 2004, there were only two DNA-approved CDM projects in China; at the beginning of March 2010, there were 2,413. The five provinces with the greatest number of projects are all in the west or central part of the country, and are below average in terms of per capita income. Increasing Investment in National CDM Priority Sectors The CDM project portfolio has gradually changed from non-co 2 sectors such as industrial gases, to the prioritized sectors of energy efficiency, renewable energy and methane recovery and utilization. As outlined in Table 4.2 CERs issued by projects from national priority sectors are responsible for 15 percent of total CERs issued as of March 1, In terms of estimated cumulative CERs by end-2012 (for currently registered projects), hydropower projects will be the second largest category, following HFC-23. Nevertheless, priority areas are affected by a number of barriers delaying timely issuance of CERs (see next section). Active Role in International CDM Activities China plays an active role internationally: it is a member of the United Nation s CDM EB, and until recently provided experts to its CDM Methodology Panel. With the rapid increase of CDM projects, China has increased pressure on the DOEs due to slow CDM validation. This has led to the establishment of Chinese DOEs: China Environmental United Certification Center Co., Ltd, (CEC) and China Quality Certification Center (CQC) were accredited in March CEC and CQC are currently validating 21 and 18 projects, respectively, although none have yet been registered. The Chinese DOEs still have a low market share and have not been able to alleviate the shortage in DOE services. CHALLENGES AND OPPORTUNITIES While China has made great progress in CDM project development, it still confronts many challenges. Among them are: (i) increasing the number of sectors active in the CDM market, CDM IN CHINA 63

85 CHALLENGES AND OPPORTUNITIES especially in the priority areas; (ii) ensuring effective project selection and preparation, timely and successful project validation and registration, and high issuance performance; (iii) strengthening the CDM s role in technology transfer (TT) and poverty alleviation; (iv) continuing to build human and institutional capacity; and (v) managing uncertainty. These five themes are addressed below. Actively Promoting the Development of CDM in Priority Sectors In the area of energy-efficiency CDM projects, project development is lagging behind expectations. Table 5.1 shows available methodologies and the number of projects incorporating them. The Japanese government has supported the development of approved energy-efficiency methodologies for green-field coal-fired power plants and industrial boilers, and the World Bank has supported approved methodologies for efficient air conditioners and efficient lighting. Approved energy-efficiency methodologies are also available for waste pressure and heat recovery and utilization in the steel and cement industries and industrial cogeneration, as well as in improvement of steam systems. Nevertheless, the development of energy-efficiency projects has progressed relatively slowly, and the development and monitoring of new methodologies have proven to be comparatively costly. Furthermore, energy efficiency projects face a high risk of rejection due to difficulties in showing additionality. The Program of Activities (PoA) approach has not achieved a breakthrough yet, which may further hamper the development of the energy efficiency projects. The Chinese government can play an active role in continuing to promote energy efficiency projects in all of the above areas. Validation and Registration, and High CER Issuance Performance Due to the strictness of international CDM regulations, it is important that the initial selection of CDM projects be done carefully. Projects with characteristics that are unlikely to be approved should not be developed, as they waste time and resources of project developers, DOEs, and the DNA. Given that project rejection rates have increased both in general and for projects from China, awareness-raising about the CDM clearance process is important. For example, to effectively develop PDDs, project developers should make sure that they are supported by qualified consultants, as many in the past needed to change inexperienced consultants at the PDD stage, leading to substantial delays and extra costs. Also, industrial energy efficiency and large hydropower projects with generally attractive investment parameters should go through a careful review prior to application for CDM registration to ensure compliance to the additionality criteria. Both the validation process by DOEs and the registration process with the EB have been slower than was predicted at the beginning of the CDM (Table 5.2). In 2008, when the number of CDM projects drastically increased, projects had to wait several months just for a validation contract due to a limited number of eligible DOEs and the limited number of DOE staff with sufficient Chinese language skills and technical knowledge. The length of the combined validation and registration process (which also includes the process of submission of public comments) discouraged projects developers from developing CDM projects. Subsequent delays reduced the volume of CERs many projects could generate by the end of Fortunately, as the inflow rate of projects needing validation started to decrease in mid CDM IN CHINA

86 CHALLENGES AND OPPORTUNITIES TABLE 5.1 Application of Approved Energy Demand Methodologies Number of Methodology Methodology Number of Projects Registered Available Since Reference # Title in Validation Projects December 6, 2004 AM0017 Steam-system efficiency improvements by replacing steam traps and returning condensate 0 0 December 6, 2004 AM0018 Steam optimization systems 4 9 February 25, 2005 AM0020 Baseline methodology for water-pumping efficiency improvements 0 0 February 16, 2007 AM0046 Distribution of efficient light bulbs to households0 0 November 30, 2007 AM0060 Power saving through replacement by energy-efficient chillers 0 0 May 16, 2008 AM0068 Methodology for improved energy efficiency by modifying ferroalloy production facility 0 0 September 26, 2008 AM0070 Manufacturing of energy efficient domestic refrigerators 0 0 September 26, 2008 AM0071 Manufacturing and servicing of domestic refrigeration appliances using a low GWP refrigerant 0 0 July 17, 2009 AMS III.AE Energy efficiency and renewable energy measures in new residential buildings 0 0 November 1, 2002 AMS II.C. Demand-side energy-efficiency activities for specific technologies 6 7 November 1, 2002 AMS II.E. Energy-efficiency and fuel-switching measures for buildings 12 5 October 22, 2004 AMS II.F. Energy-efficiency and fuel-switching measures for agricultural facilities and activities 0 0 February 1, 2008 AMS II.G. Energy-efficiency measures in thermal applications of nonrenewable biomass 2 1 May 16, 2008 AMS-II.I Efficient utilization of waste energy in industrial facilities 0 0 August 2, 2008 AMS II.J. Demand-side activities for efficient lighting technologies 17 0 June 22, 2007 ACM0012 GHG emission reductions from waste energy recovery projects Source: UNEP (2010) as of May 1, (URC 2008c, URC 2010a), and the number of accredited Chinese validators also increased. Hence, this particular bottleneck was relaxed by In early 2010, the average time required from the DOE request for registration to registration by the CDM EB is 170 days. This is longer than the average time of 146 days required in early Reasons for this increase include: Submission of projects with doubtful additionality characteristics, particularly regarding CDM IN CHINA 65

87 CHALLENGES AND OPPORTUNITIES TABLE 5.2 CDM Project Registration Process Milestone Time Required Data Source Contracting DOE for validation of Anecdotal information from Chinese CDM project activity > 60 days DOEs/project developers, recently decreasing Validation to request for > 18 months for approx. 40% China National CDM Center registration by DOE of projects Duration from request for Average of 751 registered registration to registration projects from China by Executive Board 170 days (URC 2010a) Registration to issuance 415 days URC 2010a waste heat recovery in heavy industry and hydropower. This has led to more careful review and related delays. Not all Chinese PDD consultancies reach international standards, and some project documents reflect excessive cut-and-paste practices which may lead to inconsistencies and erroneous data. There are inconsistencies in data between feasibility studies and PDDs. Some project submissions only responded partially to previous comments or rejections made by DOE. While there are no simple solutions to streamlining the existing CDM institutional and methodological structures, the EB has embarked on reforming its procedures. First, DOEs are being monitored more intensely to ensure acceptable service standards. This monitoring of service standards has been implemented, but has resulted in the temporary suspension of the accreditation of some DOEs, which in turn lead to an aggravation of the DOE bottleneck in China in late Second, the DOE accreditation process was streamlined by the EB in its March 2009 meeting, which has since lead to a doubling of DOE accreditations. In the long term, however, this will lead to more highly qualified DOE staff and a faster turnaround time. Third, a reform of review procedures by the EB is currently underway, which could substantially reduce the EB s workload. Direct communication between project developers and the EB is envisaged and already applied in the methodology submission procedure. Fourth, the EB is also reviewing why some approved methodologies are seldom applied, and has reformed the procedure for approving new methodologies. Moreover, a prioritization of methodology development has been initiated, which will lead to top-down development of crucial methodologies and improvement of currently under-utilized ones. CDM reform was further supported by a decision of COP 15 in December A major challenge over the remaining part of the first commitment period of the CDM (i.e., through 2012), is how to ensure that the large amount of CERs included in the CDM portfolio in China get issued. By early March 2010, only about 19% of the total 962 million CERs in China s CDM portfolio had actually been issued, meaning that a total amount of about 776 million CERs or about 81% of the total estimated CER volume remains to be issued. The issuance rate in China s prioritized sectors is particularly low, with hardly any CER issuances occurring yet in biogas (including methane), biomass, landfill gas, and solar energy sectors. Issuance of CERs in the hydro and wind energy sectors has slowly begun to 66 CDM IN CHINA

88 CHALLENGES AND OPPORTUNITIES take off. Speeding up the CER issuance rate in order to bring capital into these projects is critical. Strengthening CDM s Role in Technology Transfer and Poverty Alleviation Innovations in technology promote sustainable development, and effective use of technology is at the core of addressing climate change. Technology Transfer (TT) is an important goal of the UNFCCC. The international community especially developing countries had high expectations that the CDM would help promote environment-friendly TT. These expectations were linked to the concept of additionality, i.e., that CDM projects are not just business-as-usual activities. A project using an advanced technology may be more likely to be considered additional than a project using a standard technology. Although China has promoted TT within its CDM policy for example, through its stipulation in Article 10 of the Measures ( CDM project activities should promote the transfer of environmentally sound technology to China ) analysis of China s CDM portfolio shows that few projects lead to TT. It is not a prerequisite for CDM projects, but China s view is that TT is insufficiently promoted in the CDM, and this fact limits its potential for promoting sustainable development in developing countries. However, this report shows that TT is not an end in itself and that sustainable development benefits can accrue to projects that do not involve transfers of advanced technology, but rather accrue benefits through increased dissemination of existing, perhaps domestically manufactured, technologies (see Section 4.5). The next section suggests that some fine tuning of CDM project ownership requirements may contribute positively to development of certain sectors and further boost technology transfer. Building Human and Institutional Capacity Over the past five years, CDM-related capacity building has reached a growing professional community in China s private and public sectors. With regard to specific aspects, such as promoting TT and enhancing sustainable development benefits, increased capacity-building efforts are still needed. Continuously improving the capacity of national and provincial institutions and their ability to cope with new market mechanisms is a necessary condition for adapting to the still undefined post-2012 CDM. Managing Uncertainty about International CDM Rules and Market At the international level, changes in CDM rules and in the interpretation of key principles may generate considerable uncertainty. For example, the interpretation of additionality has been tightened considerably over time, and more guidance for the use of the additionality tool has been provided. This has reduced uncertainty in the interpreting of key aspects of the CDM, and has therefore helped clarify which projects are eligible and thereby reduced submissions of not satisfactory projects. Nevertheless revisions of baseline methodologies can lead to workload peaks, as project developers and validators want to submit their PDDs for registration before the methodology version they have been using expires. For example, a peak of several hundred registration requests occurred in early August 2008 due to this reason. Looking forward, China faces uncertainty around the EB s consideration of an enhanced barrier test on some types of financially profitable projects, such as wind farm and industrial waste heat and gas recovery projects. The 15th and 16th meetings of the EB rejected registration requests for sixteen wind farm CDM projects using the argument that China had reduced CDM IN CHINA 67

89 CHALLENGES AND OPPORTUNITIES feed-in tariffs for wind farms intentionally in order to encourage developers of wind projects to apply for CDM. China made a strong objection on COP 15 making reference to the China Wind Farm and Tariff Pricing Research study, conducted by the China-Denmark Wind Energy Development Program and the Chinese Renewable Energy Industries Association (CREIA), to justify the indicators used for defining feed-in tariffs of wind farms. Up until now, however, only 2 of the 16 rejected projects have been registered. In order to improve CDM functioning, especially in a critical renewable energy sector as wind farms, it is important that a common understanding about this situation be reached between the various parties. The reform of CDM after 2012 is a topic of the Ad Hoc Working Group (AWG) on further Commitments for Annex I Parties under the Kyoto Protocol. The Parties commonly agree that emissions trading and project-based mechanisms under the Protocol should continue to be available to Annex I Parties as a means to meet their emission reduction targets, and could be appropriately improved to promote the environmental integrity of the Protocol and the contribution of its mechanisms to sustainable development. However, CDM market players are waiting for how and when a new international regulatory framework will emerge. Until then, market players seem to be hesitant to develop new CDM projects for the period post CONCLUSIONS This report has shown that China has come to dominate global CER supply, and has been successful in leveraging carbon finance to implement its sustainable development priorities. Yet investments in several hundred CDM projects currently under implementation represent a limited contribution to the larger task of stabilizing China s greenhouse gas emissions. In all CDM priority areas targeted by the 11th Five-Year Plan period ( ) which exclude industrial gas projects registered CDM projects had generated only 8.9 million CERs as of end 2008, i.e. halfway through the Five-Year Plan period. This total had increased to around 35 million CERs by March 2010, but this is still much less than 1 percent of China s annual CO 2 emissions. This contribution could improve significantly if projects requesting registration would generate carbon offsets either at the CER levels estimated in the PDDs or at levels consistent with specific project-type performance factors (URC 2010a). In the area of energy efficiency, for example, the government set a goal to reduce energy intensity per unit of GDP by 20 percent between 2006 and 2010, and began implementing 10 key energy-saving programs. These programs are expected to result in 550 million tons of CO 2 reductions during the 11th Five-Year Plan period. CDM s only significant contribution to these efforts to date has been in waste heat and gas recovery and utilization. 2 Thirty registered projects in these areas have generated only 12 million CERs by May Furthermore, CDM activities have scarcely impacted the main areas of concern coal-fired power generation, energy-intensive industries (other than steel and cement production), buildings, and transportation. Can the CDM deliver more? On the assumption that the global CDM market will continue to operate in a manner that builds directly on the valuable experience gained under the Kyoto Protocol, this report concludes that China could do more to expand the scope and depth of its participation in CDM markets. To use CDM 2 There is some overlap between the technologies mentioned in this category (particularly in the area of cogeneration) and the energy conservation category (where all CERs are derived from the use of waste heat or gas for self-generation). 3 No CERs have been issued for other supply-side technologies mentioned in the NCCP, such as small-scale distributed natural gas, advanced power transmission/transformation/distribution technologies, or 600 MW or larger supercritical and ultrasupercritical combined-cycle thermal power plants. 68 CDM IN CHINA

90 CHALLENGES AND OPPORTUNITIES more effectively in addressing China s sustainable development priorities, as well as in achieving increased emissions reduction, gaps such as clean coal generation, end-use efficiency, and afforestation/reforestation need to be addressed. In addition, related issues such as market efficiency, delays, and capacities need to be addressed. Here are several strategies that build on the success of CDM in China to date and may help to enhance the value-added of CDM in the near term: Encourage technology transfer via CDM. This might be fostered by close involvement with the Ministry of Commerce and its Investment Promotion Agency activities, which aim to promote advanced clean technology investment in China. Technology benchmarks could be set as requirements for example, if a certain technology is widely available in China, then only projects using more advanced technologies would qualify under CDM. This should not be a universal requirement, but should meet current market needs (see next bullet). Other options to promote advanced TT might include dropping the majority Chinese ownership requirement for hosting CDM projects; reducing or eliminating import duties on climate-friendly technologies; and including additional reporting on TT indicators in the CDM application and approval process, including indicators for soft skills that create an enabling environment for TT, such as training in technologies applications. Also, improved protection of intellectual property rights would give greater security to technology providers. Encourage wider dissemination of climatefriendly Chinese technologies domestically. China already manufactures a range of clean and efficient products and technologies, yet the top technologies are not always offered on the large domestic market. Examples include high-efficiency industrial electric motors and high-efficiency home appliances. Benchmarking systems to identify the top products and suitable CDM business models (for example, manufacturer pay-as-you-save purchasing schemes) and methodologies could be developed to promote domestic dissemination of such technologies. Now that the basic concept of technology benchmarking has been accepted by the CDM Executive Board, this strategy could result in huge emission reductions, while strengthening domestic consumption and supporting economic growth. Expand the horizon of Chinese enterprises to take advantage of additional CDM opportunities. To date, Chinese enterprises have acted as domestic CDM project hosts, but opportunities for them to tap into the carbon market in the context of their export or foreign direct investment (FDI) activities have largely been overlooked. Given China s important role in international trade and growing role in FDI, a program to encourage Chinese enterprises to leverage CDM funding to reduce the carbon footprint of their foreign investment projects in other developing countries (such as in the oil and gas industry) could reap large benefits as could a program to offset any additional costs of Chinese-manufactured climate-friendly technologies sold to other non-annex I countries. Appropriate business models and related support mechanisms and incentives could be developed, perhaps with assistance from the Chinese CDM Fund. Promote CDM development in important sectors, such as buildings, transportation, and enduse energy efficiency, as well as in China s least developed regions. This could be done in various ways, such as creating incentives for those sectors comparatively less advanced with regard to CDM projects, providing government support for methodology development in priority sectors, and providing training in specific methodologies in priority sectors (particularly to project developers and local authorities in the least developed Provinces). CDM IN CHINA 69

91 CHALLENGES AND OPPORTUNITIES Consider developing strategic plans to leverage CDM resources to co-finance priority government policies, programs, and projects that also mitigate climate change. There are many ways to approach this. One way would be for the Chinese approval process for major infrastructure projects to include an evaluation of whether such projects could be modified to better mitigate GHG emissions and qualify under the CDM. Another way would be to enable Provincial Energy Conservation Centers to serve as managing entities for a wide range of end-use efficiency activities. A third opportunity would be to design a CDM program under the Top 1000 Enterprise Program to reward enterprises that exceed some benchmark energy-saving level. Continue capacity-building activities. Effective project preparation requires capacity of all involved parties. Specific capacity-building needs include: Training of CDM consultants and project developers to improve understanding of international CDM rules to prevent reviews and rejections of projects, to maximize the sustainable development benefits of CDM projects, and to integrate local stakeholders in project development. Strengthening the domestic capacity to improve CDM methodologies and submit requests for revisions to the UNFCCC, including the establishment of an expert knowledge base. Training auditors in eligible domestic organizations to become DOEs to relieve the shortage of validation personnel. Strengthening capacity to analyze and understand developments in the international carbon market, including such topics as accessing voluntary markets, linking regional markets, and understanding different emission reduction standards. Encouraging new models to scale up CDM development, such as programmatic CDM (PCDM). CDM investments in several hundred projects currently under implementation represent an important but limited contribution to the larger task of stabilizing China s greenhouse gas emissions. Innovative concepts relating to CDM could enhance these opportunities. There are several PoAs under preparation in China, but they face challenges at the LoA and coordinating agency set-up stages, and DOEs may perceive higher risks for ERs delivery. Introducing market mechanisms to accelerate emission reduction related activities. The three newly established environment/energy exchange centers in Beijing, Tianjin and Shanghai are good pilots for bringing innovations for emission reduction standards, domestic trading, and linkages with international trades. In the post-2012 period, China will face a complex policy-making landscape, shaped by international pressure to slow, stabilize, and eventually reduce its GHG emissions, and by domestic challenges to provide access to safe, reliable, and environment-friendly energy services while continuing economic development and poverty reduction. As China transitions to a lower carbon economy, the CDM s role in this transition remains to be mapped out. The CDM or a future version of carbon markets should play an important role, one in which China can maintain a leadership role. 70 CDM IN CHINA

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96 Case Studies Selected Provinces and Specific World Bank Projects Some provinces in China display a well established institutional capacity as well as effective CDM project development skills. This chapter presents some interesting case studies on Yunnan, Inner Mongolia, Shanxi, and Hubei Provinces. Each province is described below in general terms, before presenting the status of CDM implementation. Achievements in terms of environmental, social and economic benefits and comparative advantages created by CDM, and the main barriers to CDM development in each province, are also given. This annex also describes in some detail three World Bank CDM projects implemented in these provinces: the Whitewaters Hydro project in Yunnan Province, and the Guangrun Hydropower project, and Eco-Farming biogas project in Hubei Province: In Yunnan Province the World Bank developed the Whitewaters Hydropower project, which was registered in 2007 and produces around 275,000 tons CO 2 average annual ERs. This is a good example of using carbon revenue to strengthen capability of project financing through commercial channels. In Hubei Province, the Guangrun Hydropower Project (GHP) is one of the five hydropower projects under the scope of World Bank-financed program for Hubei Hydropower Development in Poor Areas. It is located in Jianshi County, Hubei Province. Emission reductions from the project are purchased by the World Bank Community Development Carbon Fund (CDCF), and the fund lays out specific project selection criteria on poverty alleviation. Based on site investigations and public consultations, a Community Benefit Development Plan (CBDP) was launched to focus on enhancing infrastructure and social service facilities in nine poor villages affected by the project construction. The CDCF provides advance payments from the CDM revenue and additional grant funding to support the implementation of CBDP. The local government is also contributing to developing and financing of the project. Also in Hubei Province, the Eco-Farming Project includes 8 counties within the Enshi Prefecture, with a total of 33,000 households in 625 villages and 81 townships. It is referred to as the one biogas digester with three supplementary renovations project, since it includes biogas digesters replacing deep pits, toilet improvements, pig pens and kitchen renovations. The emission reductions come from two resources: (i) recovery and utilization of biogas after manure digestion to replace household use of fossil fuels (primarily, coal), and (ii) by avoiding CH 4 emission from the slurry that would otherwise have been stored in a deep pit. CDM IN CHINA 75

97 CASE STUDIES SELECTED PROVINCES AND SPECIFIC WORLD BANK PROJECTS Yunnan Province Background Yunnan, with its plentiful hydraulic resources, ample rainfall and numerous rivers and lakes, has a water resource per capita of about 10,000 m 3, or four times the average level of the whole country. The exploitable waterpower capacity is million kw, accounting for one-quarter of the country s. Yunnan is among the less developed provinces in terms of GDP per capita and is in the early stages of industrialization. (In 2008, Yunnan s GDP per capita was ranked No.30 out of 31 provinces). The government s 11th Five-Year Plan in Yunnan aims to build a province with a strong green economy. Based on natural resources, the Yunnan government has developed an energy development strategy that emphasizes hydropower, biomass energy, solar, and other clean energy sources within the framework of environmental protection. Since 2008 Yunnan has had a CDM center. Status of Yunnan s CDM implementation Yunnan s portfolio is dominated by hydropower projects, in both number of projects and estimated annual CERs. The province contributes more than 20 percent of all annually expected CERs from Chinese hydropower projects. Yunnan has the largest number of DNA-approved CDM projects in China (280, representing 11.6 percent of the total), yet it contributes 6.7 percent to China s total expected annual CERs. As of March 1, 2010, 94 projects, which are expected to deliver 9.34 million CERs annually, had been registered by the CDM Executive Board. However, currently only hydropower projects are issuing CERs, accounting for 0.5 percent of China s issued CERs to date. This shows that the issuance success of these hydropower projects is low. Achievements Successfully using comparative advantages via the natural resource water. Developing renewable energy projects which belong to the CDM priority areas. Barriers The insufficient water resources because of weather condition. The limitation on electricity feed-in due to decrease of demand. And the unstable operation performance during testing period. Methane projects are not sufficiently developed and lack issuance. Options The proven coal reserves coal in Yunnan is more than 15 billion tons. Further enhancement of developing methane projects in order to address environmental benefits is envisaged. To be consistent with its provincial development strategy and to enhance social and environmental development, Yunnan could expand CDM activities in the field of household biogas and waste heat recovery. Registered Projects in Yunnan Number of Percentage of Registered Annual CERs Percentage of Project Type Projects National Total (ktco 2 e) National Total Hydro % 8, % N % % Methane 2 3.3% % Total % 9, % (continued) 76 CDM IN CHINA

98 CASE STUDIES SELECTED PROVINCES AND SPECIFIC WORLD BANK PROJECTS DNA Approved Projects in Yunnan Percentage of Percentage of Project National Estimated Annual CERs National Project Type No. Total (%) (ktco 2 e/y) Total (%) N 2 O % % Wind 4 0.9% % Methane Recovery and Utilization 4 2.1% % EE % % Hydro % 27, % Total % 29, % World Bank Project Example in Yunnan Province The Yunnan Whitewaters Hydro Project Project Information The Yunnan Whitewaters Hydro Project includes hydropower stations located at the Whitewaters River in Yanjin county which is located in a mountainous area and is listed as a national-level least developed county. Yunnan Zhongda Yanjin Power Generation Corporation Ltd., the project developer, sought US$ 44 million of debt finance, accounting for 60 percent of total investment cost. The project was registered in April 2, 2007 with average annual ERs of 274,560 tons of CO 2. The first ER issuance is about 60,773 tons of CO 2 covering period from Jan 22, 2008 to Jan 25, Achievements Currently, IFC and other financial institutions are satisfied with the Debt Service Credit Ratio (DSCR) as a result of the inclusion of carbon revenue and have agreed to provide debt financing to the commercially operating power plant, a sector considered to involve a higher degree of risk in international project finance. This project is an example of how carbon finance can play an important role in enabling an international financial institution to provide assistance to an otherwise relatively risky sector. Barriers One of the project s greatest barriers is its inability to raise debt financing from lenders because of the risk related to cash flow. Lenders are more concerned about the risk of default than the project s long-term profitability, therefore the contribution from CDM helps improve the project s cash flow and its debt service coverage ratio (DSCR) and strengthens the lenders confidence with regard to a financially risky project. CDM IN CHINA 77

99 CASE STUDIES SELECTED PROVINCES AND SPECIFIC WORLD BANK PROJECTS Inner Mongolia Background Inner Mongolia Autonomous Region is located in the north of China. The Yellow River crosses the Eerduosi llano area, which is rich in the renewal resources of wind, solar, and water. Stockbreeding is well developed, and biomass and renewable energy resources have major potential. According to the 11th Five-Year Plan for Inner Mongolia, development efforts will focus on renewable energy, natural gas, coal, and electric power with wind, solar, and biomass resources receiving priority. As this province still faces challenges in development and innovation processes, activities involving energy conservation and emission reduction have been, until recently, quite low. Mongolia has an active CDM center. Status of Inner Mongolia s CDM implementation As of March 1, 2010, a total of 174 CDM projects had been approved in Inner Mongolia. The dominant project type is wind power, with the 148 projects approved contributing over two-thirds of the province s total estimated annual CERs and nearly 40 percent of all CERs from wind power for the entire country. There are only four biomass energy projects with DNA approval in Inner Mongolia, and no solar projects. Four large energy efficiency projects contribute significantly (13.5 percent) to the national total expected annual CERs. About 30 percent of the DNA-approved projects have been registered by the CDM EB. 48 wind power projects, four industrial waste heat and gas projects, two N 2 O decomposition projects, as well as a major fossil fuel switch project and a project to produce cement from calcium carbide are anticipated to yield annual CERs of about 10,227 ktco 2 e. However, in terms of issued CERs as of March 1, 2010, Inner Mongolia has only contributed around 1.6 percent to the total issued CERs in China. Achievements The province is successfully using its comparative advantage of wind power and is scaling-up the implementation of methodologies in which it has recently gained experience. Inner Mongolia demonstrates that CDM can play an active role in promoting wind power generation. The government is encouraging further development of the wind sector. Social and economic developments additional to emissions reduction, such as meeting the local power demand for household, improving living standards of local people and slightly increasing job opportunities. Barriers Despite the development of renewable energies referred to in the province s 11th Five-Year Plan, an incomplete industry structure hinders progress at present. Technological innovation has improved significantly, but it still lags behind other parts of the country. Risks relating to registration and verification also suppress the market attractiveness of biomass and solar projects. Options To be consistent with the 11th Five-Year Plan, biogas energy and solar projects could be further developed and addressed. Inner Mongolia is poised to continue developing wind projects and make full use of biomass, solar, hydro, and natural gas resources. To address climate change and achieve sustainable development, funding support is needed, along with technology transfer and capacity building. (continued) 78 CDM IN CHINA

100 CASE STUDIES SELECTED PROVINCES AND SPECIFIC WORLD BANK PROJECTS Registered Projects in Inner Mongolia as of March 1, 2010 Number of Percentage of Registered Annual CERs Percentage of Project Type Projects National Total (ktco 2 e) National Total Wind % 7, % EE Own Generation 4 5.5% 2, % N 2 O 2 7.7% % Fossil Fuel Switch 1 5.3% % Cement Production from Calcium Carbide % % Total % 10, % DNA Approved Projects as of March 1, 2010 Percentage of Percentage of Project National Estimated Annual CERs National Project Type No. Total (%) (ktco 2 e/y) Total (%) Fossil Fuel Switch 1 2.4% % Hydro 2 0.2% % Methane Recovery 4 2.1% % Biomass Energy 4 3.9% % Energy Efficiency % 3, % Wind % 22,396, % N 2 O 2 7.1% % Produce Cement from Calcium Carbide 2 9.5% % Total % 29, % Shanxi Background Shanxi Province is located in northwest China and is very rich in mineral resources, particularly coal. An area of 62,000 km 2 contains 260 billion tons of coal, about one-third of the coal storage in China. Annual coal production is about 300 million tons in Shanxi. Coal bed methane, which is found in several large coalfields, constitutes about one-third of the country s entire supply. The Shanxi government published the 10th Five-Year Plan of Environment Protection in Shanxi Province which targeted an increase in investment in environmental protection, strengthening the national policy of environmental protection. However, some barriers still exist. In the 2005 Report of Sustainable Development Strategy in China, Shanxi was ranked 25th on the Comprehensive Sustainable Development Power lists. Capacity for sustainable development still requires substantial improvement. (continued) CDM IN CHINA 79

101 CASE STUDIES SELECTED PROVINCES AND SPECIFIC WORLD BANK PROJECTS Status of Shanxi s CDM implementation As of March 1, 2010, a total of 91 CDM projects had been approved in Shanxi, with estimated annual CERs of 32.9 million tons. Two-thirds of these CERs are anticipated to be generated from 33 methane recovery and utilization projects. Shanxi is a leader in methane recovery one of China s CDM priorities. Shanxi s industrial energy efficiency and N 2 O projects also contribute significantly to national CERs for the respective project types. Other projects involve fossil fuel switching, renewable energy supply, and cement production from calcium carbide. Only 25 projects have been registered by the CDM EB. Nonetheless, Shanxi s nine registered coal bed methane projects are projected to contribute more than 50 percent of the annual CERs from all registered CBM projects. CDM in Shanxi consists primarily of methane recovery and utilization projects. Approved projects of this type in Shanxi amount to about 43.7 percent of the national total. In the registered project list, coal bed methane projects in Shanxi constitute nearly half of these types of projects in China. However, in terms of issued CERs only methane recovery projects are issuing a fair amount of CERs by March 1, The total amount of issued CERs in Shanxi amount to 1.4 percent to the national total issued CERs. Achievements The province is successfully using its comparative advantage in methane recovery. The province achieved a good diversified CDM portfolio. Barriers Of the 9 registered CBM projects, only 4 have issued CERs to date. The main barriers are (a) complexity of monitoring especially for CBM CDM project and (b) difficulty in fulfilling CDM requirement (additionality). New options and recommendations In addition to exploiting mineral resources, Shanxi should also address options to further expand renewable energies and other clean technology. CDM is an effective market mechanism for GHG emission reduction, offering a good opportunity for Shanxi to promote resource saving and pro-environment society. Registered Projects as of March 1, 2010 Number of Percentage of Registered Annual CERs Percentage of Project Type Projects National Total (ktco 2 e) National Total Wind 3 1.8% % Coalbed Methane % 8, % EE Own Generation 6 8.2% % N 2 O % 1, % Cement Production from Calcium Carbide % % Total % 11, % (continued) 80 CDM IN CHINA

102 CASE STUDIES SELECTED PROVINCES AND SPECIFIC WORLD BANK PROJECTS DNA Approved Projects as of March 1, 2010 Percentage of Percentage of Project National Estimated Annual CERs National Project Type No. Total (%) (ktco 2 e/y) Total (%) N 2 O % 3, % Wind 5 1.1% % Methane Recovery and Utilization % 22, % EE % 4, % Fossil Fuel Switch % % Biomass Energy 3 2.9% % Hydro 7 0.6% % Cement Production from Calcium Carbide 1 4.8% % Total % 32, % Hubei Province Background Hubei Province, located in central China, consists of an area of 185,900 km 2, accounting for 1.9 percent of the total area of China. In 2006, the population of Hubei was 60.5 million. Its climate is characterized by hot summers and cold winters. It is rich in hydropower resources, but has a relative lack of fossil fuels. 30 percent of the province is forested above the national average. According to the Hubei Provincial Climate Change Programme (draft), total GHG emissions in 2005 were 266 million tco 2 e, of which 212 million tco 2 e were from fossil energy combustion, accounting for 85 percent of the total emissions in the province. In 2005, the major GHG emissions from industry production process resulted from production of cement, with total CO 2 emission of 17.3 million tons, accounting for 6.7 percent of the total. Total GHG emissions from Hubei s agriculture industry of in 2005 were million tco 2 e, of which about 7.4 million tons of methane came from rice fields and livestock and their wastes and 6.2 million tons of N 2 O from agricultural soil and livestock manure. The carbon sink of Hubei in 2005 was estimated to be 1.1 Mt CO 2. Status of Hubei s CDM implementation 81 projects have recently been approved by the government, ranking Hubei Province 10 th in the country in CDM projects, with total annual CERs of about 9 million tco 2, or 2 percent of the country s total. Of 81 projects, 41 are hydropower projects contributing annual CERs about 3.3 million tco 2 and 26 are EE projects with annual CERs of about 4 million tco 2 e. Others include wind power, fossil fuel switch, biomass, and methane recovery and utilization. As of March , there are 27 projects from Hubei Province registered in the EB, including 20 hydropower projects, 1 wind project, 4 WHR projects, 1 fossil fuel switch project and 1 biogas project. Total annual registered CERs is 2.5 million tco 2 e. (continued) CDM IN CHINA 81

103 CASE STUDIES SELECTED PROVINCES AND SPECIFIC WORLD BANK PROJECTS Hubei Province Continued Hubei Province is rich in solar energy, with annual sunshine hours ranging from 1,150 to 2,245 hours, which equals tce per year, and has recently commenced development and utilization of wind energy and solar energy. By 2010, the total potential installed capacity of wind energy may exceed 0.1 GW, and there could be wide utilization of solar energy. The potential installed capacity of straw-driven generation may reach 0.1 GW, while waste incineration power generation may exceed 50 MW by It is advisable for Hubei Province to accelerate development of landfill gas capture, livestock waste gas recovery projects, and construction of biogas digesters in rural areas. It is projected that by the end of 2010, total renewable energy will account for 5 percent of total energy consumption in Hubei Province. Achievements Additional local environmental benefits: the first four projects alone will generate 2,695,000 MWh in net electricity supply annually, reducing demand for electricity from the Central China Power Grid (mainly supplied by coal-fired power plants). This will avoid the combustion of 5.26 million tons of standard coal, resulting in emission reductions of 2.6 million tons of greenhouse gases, 0.3 million tons of particulates, 59,000 tons of sulfur dioxide (SO 2 ) and 53,000 tons of nitrous oxide (NOX) annually. These reductions will have local air quality benefits. The establishment of these projects helps to meet local power demand for industrial and household use, and improve living standards of local people. The projects also increase local job opportunities (Dongliuxi Erji creating 38 permanent jobs during the operation period, and Guangrun hydro creating another 60 permanent jobs). Successfully creating an institutional framework for implementing CDM projects (local CDM Center) Successful efforts in capacity building (south-south exchange) Barriers The main barriers are (a) complexity in fulfilling CDM additionality requirements and (b) financial constraints. Barriers to carbon sink efforts include complicated methodology, narrow application of the methodology, and difficulties in verification and certification. Options Implementation of energy conservation projects for 100 key enterprises in Hubei will boost those energy-intensive industries to save energy on a large scale. The potential annual rate of energy conservation in key industries such as the production of synthesized ammonia, caustic soda, cement, aluminum smelting, phosphorous chemicals, and petrochemicals may exceed four percent. Promotion of CDM projects will foster implementation of such energy conservation projects by providing related financial and technical support. To maximize the development potential, the province will make full use of the approved methodology for improving energy efficiency to promote technology improvement and the use of alternative material in scaled energy-intensive enterprises to reduce GHG emissions and realize energy conservation. In cement production, Hubei will not only focus on alternative raw material with low-carbon, alternative fuel such as less-carbon fuels and waste incineration, but also on cogeneration, recovery, and utilization of heat in the production process. Hubei Province also adhered to the requirements of the Energy Efficiency Standards for Residential Buildings in Areas with Hot Summer and Cold Winter and is promoting consistent renovations. Even if challenging, this type of activity could bring new projects to the building sector. Hubei Province would benefit from vigorous development of its public transportation sector to improve transportation energy efficiency. Areas where improvements could be realized include reducing the number of vehicles on the road; promoting the use of clean fuels; implementing fuel economy standards and promoting gasoline conservation technology; and early retirement of energy- and emission-intensive older vehicles. Hubei plans to raise the capacity of carbon sink from 1.09 million tco 2e in 2005 to 1.11 million tco 2e in 2010, with the total forest coverage rate of Hubei expected to increase to 41 percent. (continued) 82 CDM IN CHINA

104 CASE STUDIES SELECTED PROVINCES AND SPECIFIC WORLD BANK PROJECTS The Hubei Provincial Climate Change Programme (draft) encourages construction of household biogas, medium-scale, and large-scale biogas projects. In addition, landfill gas recovery, livestock waste methane recovery, and industrial wastewater methane recovery should provide opportunities for CDM projects in Hubei Province. Percentage of Project Type Project National Total Registered Annual CERs Percentage of No. in Pipeline (ktco 2 e) National Total Hydropower % 1, % Wind 1 0.6% % Methane Recovery & Utilization (Household Biogas) 1 1.6% % Energy Efficiency 4 5.5% % Fossil Fuel Switch 1 5.3% % Total % 2, % Percentage of Project National Total in Estimated Annual CERs Percentage of Project Type No. This Project Type (ktco 2 e/y) National Total Wind Power 2 0.4% % Methane Recovery & Utilization 5 2.6% % Energy Efficiency % 4, % Fossil Fuel Switch 2 4.8% % Biomass 5 4.8% % Hydropower % 3, % Total % 8, % World Bank Project Example in Yunnan Province The Guangrun Hydropower Project Status: registered 27 April 07 Issuance: pending Credit Start: 01 July 08 Location: Jianshi County, Enshi Tujia and Miao Minority Autonomous Prefecture Capacity: 28 MW Annual generation: GWh Methodology: ACM 2 Parties Involved: P.R. China (host) and VROM (NL) Project Participants: Guangrun Hydropower Development Company Ltd. and IBRD as trustee of Community Development Carbon Fund Focal Point: IBRD Project Developer: Guangrun Hydropower Development Company Ltd. Validator: DNV Credit Buyer: Netherlands (IBRD) PDD Consultant: Tsinghua University Financing: Community Development Carbon Fund (CDCF) entrusted at the WB Host LoA: 07 Nov 06 tco2e/yr: Total est. reductions tco 2e : 530,826 (7 years) 2012 tco 2 : (continued) CDM IN CHINA 83

105 CASE STUDIES SELECTED PROVINCES AND SPECIFIC WORLD BANK PROJECTS The new dam project is located in the southwest corner of Hubei Province, Jianshi county. The Guangrun Hydropower Project (GHP) consists of two new small reservoirs and three small-sized hydropower plants with average power density of 32.3 W/m2. The proposed installed capacity is 28 MW (Hongwawu I 8 MW, Hongwawu II 10 MW and Zhamushui station 10 MW). The annual generation from the GHP is expected to be GWh resulting in 3,188 full load hours. The Hongwawu hydropower plant (including a dam of 41.5m and a reservoir of 4.98 mn m3) is located on the Hongwawu River, a tributary of the Zamushui River in Jianshi county, about 30 km from the Jianshi county seat. The Zhamushui hydropower plant (including a dam of 77.5 m and a reservoir of mn m3) is located on the Zhamushui River in Jianshi county, about 3.5 km from Jianshi county seat. The water head is formed by taking advantage of the natural height drop, which then enters into the pressure adjustment well. The hydraulic pressure of the water is built up through a high pressure penstock through which the water flows into the power house where it drives the turbine/generator sets to produce electricity. The purpose of the project is to connect the GHP to the Jianshi electricity network, which is part of the Hubei Provincial Power Grid (HPPG) and Central China Power Grid (CCPG). Currently, the Jianshi network is importing peak power from and selling seasonal surplus power to the HPPG, then CCPG. The GHP will reduce import and increase export of electricity to HPPG and CCPG, and subsequently displace power generation by coal-fired thermal power plants in the dry season. As CCPG is dominated by thermal power plants, the project is mitigating GHG emissions from fossil fuel combustion by replacing electricity generated by fossil fuel-fired plants with electricity generated by renewable energy resources. In 2004, the total amount of power generation within CCPG was 401,510 GWh, of which 270,846 GWh came from thermal power plants accounting for about 70% of the total. This situation is unlikely to change in near future. The annual emission reduction from GHP is estimated to be around 76 ktco 2e during the first crediting period resulting in CO 2 emission reductions of around 530 ktco 2e (7 crediting years). In the absence of the project, the same energy load would have been taken-up by newly built coal-fired power plants and existing plants. The project was registered as CDM project in April 2007 and started operations in July 2008 (Hongwawu Stations). Unique Characteristics Community Benefits Development Plan (CBDP) The implementation of a Community Benefit Development Plan (CBDP) has been prepared to use the Community Development Carbon Fund (CDCF) effectively. The CDCF aims to combine community development attributes with emission reductions to create development plus carbon credits. Six types of projects will be funded within the framework of CBDP including transportation infrastructure, drinking water and irrigation facilities, education and public health systems, technical training programs, industry development and local culture exploration. Environmental benefits Zero-emitting renewable energy to the HPPG and CCPG, thus decreased environmental pollution caused by fossil-fuel fired plants. Improved flood control standard and water supply quality of more than 70,000 people in Jianshi country. The project reservoir will improve local irrigation system and agriculture infrastructure. Socio-economic benefits Increased income of local government and residents, thus alleviation of poverty in Enshi Tujia and Miao Minority Autonomous Prefecture. Job generation (more than 1,500 jobs during the construction period and 60 permanent staff position during operation). (continued) 84 CDM IN CHINA

106 CASE STUDIES SELECTED PROVINCES AND SPECIFIC WORLD BANK PROJECTS Improved local transport routes. Implementation of Community Benefit Development Plan (CBDP) Additionality For additionality testing a benchmark analysis was used to identify whether the Internal Return Rate in this project was better than the relevant benchmark. The sectoral benchmark IRR on total investment for power projects is 8%. Based on the key data of the project (e.g. 28 MW capacity, GWh/y, etc.) the IRR of the project without CER revenues would be 6.98%. Therefore, the project was assessed as additional. Including CER revenues (assumed market price US$ 11/tCO 2 ) the project achieves an IRR of 9.13%. If the annual average output was increased by 8.9%, the IRR would exceed the investment benchmark. However, if the investment decreased by 9.2%, the IRR would exceed the investment benchmark. The impact of the annual operation and maintenance costs are assessed to be marginal. Achievements The GHP will reduce import of electricity from other Provinces and increase export of electricity to Hubei Provincial Power Grid and Central China Power Grid, and subsequently displace power generation by coal-fired thermal power plants in the dry season. Barriers The sufficiency of water resource will affect the project performance Technical training are required for proper operation and maintenance Second World Bank Project Example in Hubei Province The Eco-Farming Biogas Project Status: registered 19 Feb 09 Issuance: pending Credit Start: 19 Feb 09 Location: 625 villages in 81 townships in 8 counties of Enshi, Lichuan, Jianshi, Badong, Xuan en Xianfeng, Laifeng and Hefeng counties Capacity: 42.2 MWth (bundled) Methodology: AMS-I.C.+AMS-III.R. Parties Involved: P.R. China (host) and VROM (NL) Project Participants: Hubei Qinggjiang Zhongye Company Ltd and IBRD as trustee of Community Development Carbon Fund Focal Point: IBRD Project Developer: Hubei Qinggjiang Zhongye Company Ltd. Validator: TÜV-SÜD Credit Buyer: Netherlands (IBRD) PDD Consultant: Chinese Academy of Agricultural Sciences Financing: WB; 25.55% loan, Government; 14.28%, 60.17% upfront investment by farmers Host LoA: 01 Jun 08 tco 2 e/yr: Total est. reductions tco 2 e: 584,440.4 (10 years) 2012 tco2: Project Description The project activities are being conducted in eight counties including Enshi, Lichuan, Jianshi, Badong, Xuan en, Xianfeng, Laifeng and Hefeng. These counties are located in poor mountainous areas of southwest Hubei Province. The project area covers 33,000 households in 625 villages in 81 townships. The project aims to demonstrate innovative technical approaches and a credible carbon trade process for a household-based CDM biogas digester program to treat the manure produced by 155,684 pigs. It is anticipated that the total biogas production will be about million m 3 per year. The thermal energy production capacity for the bundled project would be about 42.4 MW th. (continued) CDM IN CHINA 85

107 CASE STUDIES SELECTED PROVINCES AND SPECIFIC WORLD BANK PROJECTS Manure would be fermented in the biogas digester installed by the project instead of being stored in a deep pit where the manure would be in anaerobic condition. In each household, the project will also support improvements of the toilets, pig pen and renovation of the kitchen, and installation of a gas burner. The biogas will be used as thermal energy to replace the fossil fuel (coal) currently used to meet the households daily energy needs. In addition, the recovery and utilization of biogas from digested slurry in a biogas digester will reduce CH 4 emission from the slurry that would otherwise have been stored in a deep pit. Unique Characteristics Project Structure Household Level: According to the CDM project management regulation issued by NDRC of China, only one single legal entity can apply for a CDM project. Hubei Qingjiang Zhongye Company Ltd. has applied to participate in the project and has subsequently been assessed and selected as the Project Entity. The households authorize Hubei Qinggjiang Zhongye Company Ltd. to complete the application, registration and CER verification of the proposed project activities on their behalf. The Project Entity will channel the large portion of the carbon credit sales revenues to the individual farmer households for the purpose of repayment, biogas digester maintenance, and livelihood needs. The Project Entity will also use the carbon trade revenues to cover the project operation cost and technical service being provided to farmers by Hubei Qingjiang Zhongye Company Ltd. Investment Despite the local government grant, the farmers need to mobilize more than 60% of their own funding to be able to complete the biogas digester construction and related investment, and cover the biogas digester maintenance. The biogas project does not create any financial income, in contrast to many other CDM projects. The economic benefit of the biogas digester is reflected as savings in fuel expenditures (reduction of cash outflow) instead of income generation (cash inflow).the project entity channels a large portion of the carbon credit revenues to the individual farmer households for the purpose of loan repayment, biogas digester maintenance, and livelihood needs. The project entity also uses revenues to cover the project operation costs and technical services being provided to farmers. Environmental benefits The project will adopt improved management methods to change the traditional practice of manure treatment to reduce CH 4 emissions and replace coal with biogas reducing CO 2 emissions. The improved manure treatment will reduce water contamination and result in odorless sludge to be used as fertilizer. Socio-economic benefits As the project will reduce coal use by installing biogas burners for cooking and heating purposes, household indoor pollution will be significantly reduced. This will lead to decrease of respiratory diseases, eye ailments, etc. Furthermore, biogas recovery will diversify the sources of the rural energy supply reducing deforestation. The project will also reduce expenditures for household energy (coal) and increase the employment locally for skilled labor during installation, operation, and maintenance of biogas digesters. Furthermore, the project includes an important capacity building component for the farmers and local institutions. Additionality As the household-based biogas digester is installed for the household s self-use with no products to be sold in the market to generate revenues, it is considered a non-productive investment. Therefore, the Investment Analysis Approach was not suitable for demonstrating project additionality and Barrier Arguments have been used for the analysis. (continued) 86 CDM IN CHINA

108 CASE STUDIES SELECTED PROVINCES AND SPECIFIC WORLD BANK PROJECTS Achievements Capacity Building As project villages are located in remote areas, farmers lack ready access to improved technologies and management methods. Local communities and individual households are unlikely to obtain the competence and capacity to maintain and manage the biogas digester appropriately without CDM revenues from the project. Barriers Investment Barrier Despite the grant from local government, the farmers need to mobilize more than 60% of own funding to be able to complete the biogas digester construction and related investments. Furthermore, middle to low income households have difficulties in accessing financing from local commercial banks, rural credit cooperatives and other financial institutions and currently the local financial sector does not have loan products suitable for non-productive investments. Without revenue from the carbon credits, it is unlikely that households would be able to invest in and maintain such biogas digesters. However, households can use the registered project activity as a guarantee to improve their chances to borrow from the local financial market. Technical Barrier Without the CDM revenues the local communities and individual households are unlikely to obtain the competence and capacity to maintain and manage the biogas digester appropriately and the institutional capacity at the village-level s technical centers would remain sub-standard. Barrier from Prevailing Practices For an individual farmer, the current practice of deep-pit treatment method is by far considered the most attractive option for manure treatment given that it requires very limited additional investment or labor input. For cooking, the cost of the traditional cooking stove fuelled by a mix of coal, firewood and crop straw is significantly less than the installation cost of a biogas digester and the gas stove and in contrast to the biogas digester is easy to use and maintain. Other Barriers Additionally, households face further barriers including lack of awareness of changing the traditional farming and living habit and limited information, which obstructs the households absorbing new technologies and accept new innovation. CDM IN CHINA 87

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110 A N N E X Measures for Operation and Management of CDM Projects in China A1 I. GENERAL PROVISIONS Article 1 These measures are formulated in accordance with the provisions of the United Nations Framework Convention on Climate Change (hereinafter referred to as the Convention ) and its Kyoto Protocol (hereinafter referred to as the Protocol ) ratified and approved by China respectively, and the relevant decisions adopted by the Conference of the Parties, with a view to strengthening the effective management of Clean Development Mechanism (hereinafter referred to as CDM ) projects by the Chinese Government, protecting China s rights and interests, and ensuring the proper operation of CDM project activities. Article 2 According to the Protocol, CDM is a project-based mechanism under which developed-country Parties cooperate with developing-country Parties in order to meet part of the GHG emission reduction obligations of the developed-country Parties. The purpose of this mechanism is to assist developingcountry Parties in achieving sustainable development and in contributing to the realization of the ultimate objective of the Convention as well as to assist developed-country Parties in achieving compliance with their quantified GHG emission limitation and reduction commitments. The core of the CDM is to allow developed-country Parties, in cooperation with developing-country Parties, to acquire certified emission reductions (hereinafter referred to as CERs ) generated by the projects implemented in developing countries. Article 3 CDM project to be implemented in China shall be approved by relevant departments under the State Council. Article 4 The priority areas for CDM projects in China are energy efficiency improvement, development and utilization of new and renewable energy, and methane recovery and utilization. Article 5 In accordance with the relevant decisions of the Conference of the Parties, the implementation of CDM projects shall ensure transparency, high efficiency, and accountability. II. PERMISSION REQUIREMENTS Article 6 CDM project activities shall be consistent with China s laws and regulations, sustainable development strategies and policies, and the overall requirements for national economic and social development planning. Article 7 The implementation of CDM project activities shall conform to the requirements of the Convention, the Protocol, and relevant decisions by the Conference of the Parties. Article 8 The implementation of CDM project activities shall not introduce any new CDM IN CHINA 89

111 ANNEX 1 obligation for China other than those under the Convention and the Protocol. Article 9 Funding for CDM projects from the developed-country Parties shall be additional to their current official development assistance and their financial obligations under the Convention. Article 10 CDM project activities should promote the transfer of environmentally sound technology to China. Article 11 Chinese funded or Chineseholding enterprises within the territory of China are eligible to conduct CDM projects with foreign partners. Article 12 CDM project owner shall submit to the Designated National CDM Authority the following documents: CDM project design document, certificate of enterprise status, general information of the project, and a description of the project financing. III. INSTITUTIONAL ARRANGEMENT FOR PROJECT MANAGEMENT AND IMPLEMENTATION Article 13 National CDM Board (hereinafter referred to as the Board ) is hereby established under the National Climate Change Coordination Committee (hereinafter referred to as the Committee ), and a CDM project management institute will be established under the Board. Article 14 The Committee is responsible for the review and coordination of important CDM policies. More specifically, it has the following responsibilities: 1. To review national CDM policies, rules, and standards; 2. To approve members of the Board; and 3. To review other issues deemed necessary. Article 15 National Development and Reform Commission (NDRC) and Ministry of Science and Technology (MOST) serve as co-chairs, and Ministry of Foreign Affairs (MFA) serves as the vice chair of the Board. Other Board members are State Environmental Protection Administration, China Meteorological Administration, Ministry of Finance, and Ministry of Agriculture. The Board has the following responsibilities: 1. To review CDM project activities mainly from the following aspects: i. Participation qualification; ii. Project design document; iii. Baseline methodology and emission reductions; iv. Price of CERs; v. Terms relating to funding and technology transfer; vi. Crediting period; vii. viii. Monitoring plan; and Expected sustainable development effectiveness. 2. If no foreign buyer is determined by the time a project is submitted for approval, and in result the price information requested in the above term 1(iv) is not available, it must be indicated in the project design document that the emission reductions generated by the project will be transferred to China s national account in the CDM registry and can only be transferred out with the authorization of China s Designated National Authority for CDM. 3. To report to the Committee on the overall progress of CDM project activities, issues emerged, and further recommendations; and 4. To make recommendations on the amendments to this measures. Article 16 NDRC is China s Designated National Authority for CDM, with the following responsibilities: 1. To accept CDM project application; 2. To approve CDM project activities jointly with MOST and MFA, on the basis of the conclusion made by the Board; 3. To issue written approval letters on behalf of the Government of China; 90 CDM IN CHINA

112 ANNEX 1 4. To supervise the implementation of CDM project activities; 5. To establish the CDM project management institute referred to in Article 13 above, in consultation with other departments; and 6. To deal with other relevant issues. Article 17 Project owner, which refers to the Chinese-funded or Chinese-holding enterprises, shall: 1. Undertake CDM project negotiations with foreign partners; 2. Be responsible for construction of the project and report periodically to NDRC on the progress; 3. Implement the CDM project activity, develop and implement project monitoring plan to ensure that the emission reductions are real, measurable, long-term, and additional, and subject itself to the supervision of NDRC; 4. Contract designated operational entities to validate the proposed project activity and to verify emission reductions of the project activity; provide necessary information and monitoring record, and submit the information to NDRC for record purpose; and protect state and business confidential information in accordance with relevant laws and regulations; 5. Report to NDRC on CERs issued; 6. Assist NDRC and the Board in investigating relevant issues and respond to the inquiries; and 7. Undertake other necessary obligations. IV. PROJECT PROCEDURES Article 18 Procedures for the application and approval of CDM projects: 1. Project owner, or together with its foreign partner, submits to NDRC project application, and documents as required by Article 12 above. Relevant departments and local governments may facilitate such project application; 2. NDRC entrusts relevant organizations for expert review of the applied project, which shall be concluded within 30 days; 3. NDRC submits those project applications reviewed by the experts to the Board; 4. NDRC approves, jointly with MOST and MFA, projects based on the conclusion made by the Board, and issues approval letter accordingly; 5. NDRC will make a decision on project application within 20 days (excluding the expert review time) as of the date of accepting the application. The time limit for decision making may be extended to 30 days, with the approval of the Chair or the Vice Chair of NDRC, if a decision could not be made within 20 days. The project applicant should be informed of such a decision and its reasons. 6. Project owner invites designated operational entity to validate the project for registration; and 7. Project owner shall report to NDRC on the approval decision by the CDM Executive Board within 10 days as of the date of receiving the notice from the Executive Board. Article 19 Existing other relevant rules and procedures for the approval of construction projects shall apply to CDM projects. Article 20 Procedures for the project implementation, monitoring, and verification: 1. Project owner is responsible for presenting NDRC and designated operational entity project-implementation and monitoring reports; 2. NDRC is authorized to supervise the implementation of the project to ensure the quality of the activity; 3. Contracted designated operational entity verifies the emission reductions of the project activity and submits certification report to the CDM Executive Board, which will then CDM IN CHINA 91

113 ANNEX 1 issue CERs for the projects and inform project participants of its decision; and 4. NDRC or other organizations entrusted by NDRC will put the CERs issued by the CDM Executive Board in file and record. V. OTHER PROVISIONS Article 21 Developed-country Parties mentioned above refer to Parties included in Annex I of the Convention. Article 22 CDM Executive Board mentioned above refers to the board as defined in Article 12 of the Protocol for the purpose of supervising CDM. Article 23 Operational entity mentioned above refers to the entity as defined in Article 12 of the Protocol for the purpose of validation as well as verification and certification of CDM project activities. Article 24 Whereas emission reduction resource is owned by the Government of China and the emission reductions generated by specific CDM project belong to the project owner, revenue from the transfer of CERs shall be owned jointly by the Government of China and the project owner, with the allocation ratio defined as: the Government of China takes 65% CER transfer benefit from HFC and PFC projects; the Government of China takes 30% CER transfer benefit from N 2 O projects; the Government of China takes 2% CER transfer benefit from CDM projects in priority areas defined in Article 4 and forestation projects. The revenue collected from CER transfer benefits of CDM projects will be used in supporting activities on climate change. The detailed regulations on collecting and using of the revenue will be formulated by Ministry of Finance jointly with NDRC and other relevant departments. The Article does not apply to the projects already approved by the Government of China before 12 October Article 25 NDRC, in consultation with MOST and MFA, is responsible for the interpretation of this Measures. Article 26 These Measures took effect as of 12 October The Interim Measures for Operation and Management of Clean Development Mechanism Projects In China taking effect on 30 June 2004 will be abolished thereafter. Source: NCCCC. 92 CDM IN CHINA

114 A N N E X CDM-Related Policy Framework in China A2 In recent years, the Chinese central government has instituted a series of policies that prescribe the strategic objectives of economic development, population, resources, and environment, and promote the process of sustainable development. Decision to Strengthen Environmental Protection by Applying the Scientific Approach of Development In December 2005, the central government of China approved the Decision to Strengthen Environmental Protection by Applying the Scientific Approach of Development, which emphasized establishing a comprehensive, harmonious, and sustainable system for promoting socioeconomic and human development. The Decision included six parts, urging an understanding of the relationships among environmental protection, economic development, and social improvement; fostering a sense of combining both protection and development; and insisting on developing a method of conservation, safety, and cleanliness to achieve sustainable development. It suggested that a circular economy, environmental industries, and technology advancement should be encouraged in the future. By 2010, the environmental qualities in key areas and cities will be improved, and the trends of ecological environment deterioration and pollutant emission increase will be controlled. By 2020 environmental quality and ecological circumstances will be significantly improved. 11th Five-Year Plan for National Socioeconomic Development of China In March 2006, the Chinese central government unveiled the 11th Five-Year Plan for National Socioeconomic Development of China. This plan demonstrated that China should make resource conservation a basic national policy, develop a circular economy, and protect ecological environment to establish a resourcesaving and environmentally friendly society to coordinate economy development, population, resources, and the environment. China should take a new industrialization approach and insist on developing a method of conservation, safety, and cleanliness to achieve sustainable development. This plan indicated that China should promote development by resource conservation and environmental protection and fundamentally change the economic growth pattern, relying on resource efficiency improvement. In this plan, the main goals of China s socioeconomic development in the five-year period were clearly shown as follows: improve energy efficiency and reduce energy consumption per unit of GDP by 20 percent, decrease the CDM IN CHINA 93

115 ANNEX 2 water consumption per unit of industrial added value by 30 percent, and increase the comprehensive utilization rate of industrial solid wastes to 60 percent. The national total population will be controlled to less than 1.36 billion; cropland area will be not less than 0.12 billion hectares; and the trend of ecological environment deterioration will be controlled. China also clearly instituted quantitative environmental goals, such as decreasing the main pollutant emissions by 10 percent, increasing the forest coverage rate to 20 percent, and achieving the GHG emissions control effects by It is the first time that the targets on GHG emissions control and climate change were clearly described. Climate Change and CDM-Related Policies China has long attached great importance to climate change. As early as 1990, a Coordination Committee was established under the Environmental Protection Committee of the State Council. In 1998, central government organizations were streamlined, and a National Coordination Committee on Climate Change was established, including ministries such as NDRC, Ministry of Foreign Affairs (MFA), Ministry of Science and Technology (MOST), China Metrological Administration (CMA), and State Environment Protection Agency (SEPA). Mr. Zeng Peiyan, the former Chairman of State Development and Planning Committee, was appointed chairman of this committee. The Office of the National Coordination Committee on Climate Change is situated within NDRC and responsible for routine work of the committee. In the past few years, the National Coordination Committee on Climate Change has made efforts on researching, instituting, and coordinating relevant climate change policies, and provided guidance to central government departments and local governments on addressing climate change issues. In June 2007, the National Leading Group on Climate Change was established based on the National Coordination Committee on Climate Change, including 18 ministries: NDRC, MFA, MOST, Ministry of Finance (MOF), Ministry of Land and Resources, Ministry of Construction, Ministry of Communications, Ministry of Water Resources, Ministry of Agriculture, Ministry of Commerce, Ministry of Health (MOH), SEPA, Civil Aviation Administration, National Bureau of Statistics, State Forestry Administration, Chinese Academy of Sciences, CMA, and State Oceanic Administration. This group is headed by Premier Wen Jiabao, and Vice Premier Zeng Peiyan and State Councilor Tang Jiaxuan are the deputy chairmen. The NDRC director Ma Kai was appointed as the director of the office of this Group. The Office of National Leading Group on Climate Change was established in NDRC based on the Office of National Coordination Committee on Climate Change. The National Leading Group on Climate Change includes five main parts: Climate Change and Corresponding Efforts in China; Impacts and Challenges of Climate Change on China; Guidelines, Principles, and Objectives of China to Address Climate Change; China s Policies and Measures to Address Climate Change; and China s Position on Key Climate Change Issues and Needs for International Cooperation. This group is presently the highest-level institution on climate change in China. With respect to division of labor among members, NDRC is responsible for coordinating climate change policies and actions adopted by various departments; MFA leads participation in international climate change negotiation; and SMA takes the lead in participating in the work of Intergovernmental Panel on Climate Change. The Chinese organizational and institutional system on addressing climate change has been established. Guided by the Scientific Approach of Development, China will diligently carry out all the tasks in this program, strive to build a resourceconserving and environmentally friendly society, enhance national capacity to mitigate and 94 CDM IN CHINA

116 ANNEX 2 adapt to climate change, and make further contributions to the protection of the global climate system. requirement, NDRC will organize to compile provincial climate change programs in all provinces in China. China s Scientific and Technological Actions on Climate Change In June 2007, MOST and 13 other ministries published China s Scientific & Technological Actions on Climate Change, which was also an important policy for China to reduce GHG emissions and address global climate change. According to this plan, China will actively use relevant technologies and take measures to address climate change effectively. This plan developed important strategies and policies, including addressing climate change and energy safety, trends in energy development and GHG emissions, and carbon capture and storage. Through implementation of this plan by 2020, China s capacity for addressing climate change will be significantly improved through development and application of key technologies. China s Provincial Climate Change Program Based on the compilation of National Climate Change Program, the State Council of China required each province or municipality to institute a provincial climate change program. NDRC has completed draft programs in four pilot provinces (Hubei, Jilin, Shaanxi, and Yunnan). Moreover, according to the state council Measures for Operation and Management of CDM Projects in China As summarized in Section 2.3, the Interim Measures for the Management of CDM Project Activities prescribed the CDM objective and management organization in China and demonstrated the CDM project implementation procedure. The Measures for Operation and Management of Clean Development Mechanism Projects in China came into effect on October 12, Other CDM-Related Policies In addition to all of the above CDM-related policy measures, China also instituted sectoral policies focusing on energy, metallurgy, chemical industry, and construction, such as the Special Plan for Mid- and Long-Term Energy Conservation, 11th Five-Year Plan for Energy Development, Suggestion on Accelerating Small-Scale Coal-fired Power Unit Shutdown, and Development Policy for Iron and Steel Industry, Civil Architecture Energy Saving Management Provisions. These policies developed concrete goals and relevant measures and played important roles in energyefficiency improvement, structure optimization, and GHG emission reduction to promote sustainable development for each sector. CDM IN CHINA 95

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118 A N N E X The CDM Project Cycle and Approval Procedure A3 The CDM Project Cycle The UNFCCC presents the CDM activity project cycle through five main steps: Design, Validation/registration, Monitoring, Verification/ certification, and Issuance ( This annex gives details on each of these five steps, and the graph on the next page illustrates the overall CDM project development process. Project Preparation: The planning of a CDM project initiates with i) the selection of the project area, ii) a previous feasibility analysis as well as iii) the negotiation with the host-country and international partners to define participation and responsibilities. Generally, a detailed survey is conducted in the future project area to collect important information for the project and address important issues, such as additionality, meetings with stakeholders should be held at this stage to get their opinions and suggestions about the project. The World Bank in particular, requests the Project sponsors/proponents to prepare potential projects for consideration in the form of a Project Idea Note (PIN). This is a short form (about 6 pages) that provides the basic information about the project. A financial analysis model is requested from the project sponsor 1. Project Activity Design: The Project design document (CDM-PDD) and the Guidelines for completing CDM-PDD including a glossary of terms (Approval, authorization, project participants etc.) have been developed by the Executive Board. Project participants shall submit information on their proposed CDM project activity using the Project design document (CDM-PDD) that can be downloaded from the UNFCCC website. This PDD is a projectspecific document required under the CDM which will enable the Operational Entity (OE) to determine whether the project: (i) has been approved by the parties involved in a project, (ii) would result in reductions of greenhouse gas emissions that are additional, (iii) has an appropriate Baseline and Monitoring Plan 2. 1 At the World Bank, CFU (Carbon Finance Business Unit) experts will investigate further and evaluate particular aspects of the project in discussions with the project proponent and prepare a CFD with the risk assessment. The CFD is an intermediate document that provides enough information on the project to allow the Fund Management Committee (FMC) (and the Participants Committee (PC) if required) to review and clear the project and its further development. The CFD notes areas that need further study after clearance. Moreover, all projects must comply with World Bank Group Operational Policies and Procedures, including those on environmental assessment. An Integrated Safeguard Policies review and Environmental Assessment (EA) is performed as a standard part of the appraisal of World Bank Group projects. 2 For World Bank projects, the PDD is prepared by the CFU and project sponsor. CDM IN CHINA 97

119 ANNEX 3 Steps to Completing a CDM Carbon Finance Project Steps and Documentation Responsible Party Involved Project Implementation and Operation Project Design Project Design Project Concept Note Methodology Stakeholder Consultation Project Design Document (PDD) Host Country Approval Letter of Approval Registration Monitoring Monitoring Report Verification Verification Report Certification and Issuance of Credits CER Validation Validation Report PDD Project Developer Auditor 1 Designated Operational Entity (DOE) CDM Executive Board Project Developer Auditor 2 Designated Operational Entity (DOE) CDM Executive Board Project Developer Commercialization Credit Buyer Source: Proposal of a New Baseline and/or Monitoring Methodology (if a proper methodology is not available): the new baseline methodology shall be submitted by the designated operational entity to the Executive Board for review, prior to a validation and submission for registration of this project activity, with the draft project design document (CDM-PDD), including a description of the project and identification of the project participants. Use of an Approved Methodology (when existing): the approved methodology is a methodology previously approved by the Executive Board and made publicly available along with any relevant guidance. In case of approved methodologies the designated operational entities may proceed with the validation of the CDM project activity and submit project design document (CDM-PDD) for registration. 98 CDM IN CHINA

120 ANNEX 3 Letter of Approval (host-country): Every project requires the approval of the hostcountry. The government of the country where the project takes place (host-country) declares concordance with the project through an official Letter of Approval. Global Stakeholder Consultation: The PDD and all documents related to the project are uploaded to the UNFCCC website and stay 30 days open for comments. Everyone around the world can ask questions, give one s opinion, criticize or post a comment free of charge. Comments will then be analyzed by the UNFCCC. Validation of the CDM project activity: Validation is the process of independent evaluation of a project activity by a designated operational entity against the requirements of the CDM, and on the basis of the project design document 3. Following Validation, the project entity s country authority writes another Letter of Approval. Registration of the CDM project activity: Registration is the formal acceptance by the Executive Board of a validated project as a CDM project activity. The Designated Operational Entity (DOE) contracted to undertake validation submits the validation report and validation opinion to the Executive Board, along with a request for registration, together with the PDD, Baseline Study, Monitoring Plan, stakeholder consultation documentation and LoA, plus any other appropriate supporting documentation. Registration is the prerequisite for the verification, certification and issuance of CERs related to that project activity 4. Monitoring: Monitoring refers to the collection and archiving of all relevant data necessary for determining the baseline (how much GHG emissions would occur on a normal scenario without the existence of a CDM project) as well as for determining how much energy and therefore emission reductions will be saved due to the project during its life time, which is ten years. Moreover, it verifies the use of the lamps within the boundary of a CDM project activity. Negotiation of Emission Reduction Purchase Agreement (ERPA): After negotiation between project sponsors and buyers (at the World Bank generally the CFU team arranges a Pre-Negotiations Workshop and/or intensive Consultations on the project, to ensure fairness in the process of negotiating and concluding), an Emission Reduction Purchase Agreement (ERPA) is prepared. The ERPAs are the carbon off-take contracts that underlie the sale and purchase of CERs from CDM projects 5. Certification/Verification of the CDM project activity: Verification is the periodic independent review and ex post determination by the designated operational entity of the monitored reductions in anthropogenic emissions by sources of greenhouse gases that have occurred as a result of a registered CDM project activity during the verification period. Certification is the written assurance by the designated operational entity that, during a specified time period, a project activity achieved the reductions in anthropogenic emissions by sources of greenhouse gases as verified. Issuance of CERs and commercialization: The certified CO 2 reductions are converted into Certified Emission Reduction Certificates and can be sold and bought. 3 There are 26 companies listed (as of May 1, 2010). For full list of DOEs visit: 4 A CDM project pays the EB a registry fee upon application. The registration fee is a prepayment of the management fee for the CERs in the first year, which is calculated according to the average annual emission reduction during the crediting period. It is charged as US$ 0.1 per CER per year for the first 15,000 CERs for each project, and US$ 0.2 per CER per year for the latter CERs. The upper limit of the registration fee is US$ 350,000. Projects with less than 15,000 tons of CERs do not pay the management fee. Any part of the fee paid over US$ 30,000 should be returned to projects that are not successfully registered. 5 The CFU legal team at the World Bank prepares a term sheet and/or a draft ERPA for further discussion the project sponsor. During the negotiations, the final terms of the ERPA are agreed between the CFU and the project sponsor. CDM IN CHINA 99

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122 A N N E X Major CDM Capacity-Building Projects A4 Agency/ Project Name Country Partners Duration Project Objectives Activities 1 China Clean Development Mechanism (CDM) Study GTZ, World Bank, and the Switzerland MOST is the Chinese agency; the Global Climate Change Institute at Tsinghua University (TU) is the overall contractor. The following institutions are involved: the Institute of Nuclear Energy Technology; TU; Department of Thermal Engineering of TU; the Agro-Meteorology Institute of the Chinese Academy of Agricultural Sciences; the Administrative Center for China s Agenda 21; the Institute of Environmental Economics at Renmin University; the Energy Environment and Economy Research Institute, TU; the Department of Basic Industries, SDPC; Power & Economic Research Center of the State Power Corporation; Energy Research Institute; etc. Foreign experts have been coordinated by World Bank and GTZ. November 2001 July 2004 The project will examine the following: 1) CDM methodological issues in the Chinese context; 2) CDM applicability within the power and renewable energy sectors; 3) China s overall CER potential and China s overall economic benefits in the CDM regime. The activities are structured within the following three tasks: 1) CDM methodology study in the Chinese context; 2) CDM project case studies within two main sectors (electric power and renewable energy); 3) economic analysis of CER potentials for China. (continued) CDM IN CHINA 101

123 ANNEX 4 Agency/ Project Name Country Partners Duration Project Objectives Activities 2 Opportunities for the Clean Development Mechanism in the Energy Sector of P.R. China Italy Asian Development Bank Italian Ministry for the Environment and Territory; MOST; and Tsinghua University. Italian experts to be coordinated by Sino- Italian Cooperation Program for Environmental Protection, Program Management Office. Executing agency: MOST; the steering committee: senior-level representatives from MOF, NDRC, and MFA. MOST will guide the overall policy and general directions of the technical assistance (TA). The Global Climate Change Institute of Tsinghua University is the technical support unit. November 2002 December 2004 March 2002 December 2003 This component is devoted to task 4 of the project From Cases to Methodology with the four following expected results: 1) CDM project case study reports; 2) CDM project design documents; 3) CDM methodological study in selected technological areas; 4) capacity building in dealing with CDM development and implementation in the selected technological areas. The goal of the TA is to improve the global environment through reduction of GHGs. Outputs of the TA: 1) Guidelines for small-scale CDM activities and an action plan detailing strategies to promote them; 2) four GHGreduction project designs that could be eligible for CDM financing; 3) an institutional assessment report; 4) dissemination materials for TA findings. 1) Energy and CO 2 emission-reduction potentials assessment; 2) development and recommendation of a suitable project for CDM study development in the selected technological area; 3) methodology study; 4) CDM project case study guideline as teaching material; 5) study tours and crosscutting workshops; 6) case study; 7) progress reports on the case studies; 8) development of CDM project design documents; 9) submission of final case study reports and project design documents. 1) Review the CDM process and its potential as a source of finance; 2) develop a set of guidelines to elaborate simplified small-scale CDM methodologies, modalities, rules, and procedures as specified at the Seventh Conference of Parties (COP 7) to ensure environmental integrity and lower transaction cost; 3) Propose a strategy to promote such small-scale CDM opportunities; 4) Develop a set of alternative CDM designs as good practice examples, including project design, evaluation, financing, and impact assessment; 5) project workshops. 102 CDM IN CHINA

124 ANNEX 4 Agency/ Project Name Country Partners Duration Project Objectives Activities 3 Canada- China Cooperation on Climate Change (C5) Project 4 Building Capacity for the Clean Development Mechanism in China Canada United Nations Development Programme (UNDP) project funded by UN Foundation and Norway Chinese executing agency: NDRC; coordination and supervision of the project: Ministry of Foreign Trade and Economic Cooperation; implementing partner: the Global Climate Change Institute of Tsinghua University. Implementing agency: NDRC; executing agencies: China International Center for Economic & Technical Exchanges (CICETE); Energy Research Institute; DNV. June 2002 July 2004 February 2003 February 2006 The C5 Project has four components: CDM, national communications, awareness and outreach, and impacts and adaptation. Expected results of the CDM component: 1) Canada/ China CDM Advisory Group; 2) China- Canada CDM Enterprises Network; 3) CDM operational model; 4) CDM case study on urban transport; 5) CDM case study on renewable energy; 6) CDM research study on sinks; 7) methodology protocol documents for developing CDM projects in the two study sectors. 1) Strengthen government institutions ability to implement procedures that will enable Chinese industry to gain smooth approval for suitable CDM projects; 2) provide stakeholders with the skills and knowledge needed to enable CDM projects to be developed in China; 3) provide learningby-doing opportunities through on-the-ground pilot activities; 4) disseminate information on the CDM to industry and other interested parties, ensuring that capacity-building activities in China are complementary. 1) Outreach and networking: An advisory group established and a CDM Enterprise Network (CEN) with a bilingual Web site as its platform developed; 2) Develop CDM operational documents developed; 3) CDM case studies in both urban transportation and renewable energy sectors developed; 4) project symposium held. 1) Provide recommendations to government on improving the framework and procedures for the CDM; 2) develop training package for key CDM stakeholders and conduct a series of trainings; 3) provide pilot projects; 4) coordinate projects and disseminate information. (continued) CDM IN CHINA 103

125 ANNEX 4 Agency/ Project Name Country Partners Duration Project Objectives Activities 5 China- Canada CDM Capacity Building Programme 6 China- Japan Hebei local CDM Capacity Building Programme 7 CO 2 managers for the industry in the People s Republic of China (PRC) 8 China- Canada CDM Capacity Building Programme 9 Capacity building on business opportunities for CDM projects in China DFAIT/Canada (1) Japan NEDO Japan METI (2) Japan NEDO (3) Japan MIZHO EU Minister of Foreign Affairs/ Canada EU MOST; Department of S&T; Ningxia Autonomous Region. (1) MOST; Department of S&T, Hebei province (2) HEBCDM. Leading applicant : Centric Austria International Partners : Cork Energy Research Society (CERS), China. MOST; five local departments of S&T: Hebei, Shanxi, Hunan, Zhejiang, Gansu. Leading applicant: CIRPS- University of Rome, La Sapienza, Italy Partners: IST, Portugal; GEI, PRC; HELIO International, France. 2 April March 2005 (1)April 2005 July 2005 (2)October 2005 March April April 2007 October 2005 March March November 2007 (1) Develop 3 Project Design Documents (PDD and) 6 Project Idea Notes (PINs) for CDM projects; (2) develop 12 potential CDM projects list. (1) Develop 1 PDD and 5 PINs, 12 potential CDM projects list; (2) Develop 1 PDD and 5 PINs. The project aims at preparing the ground for the multiplication of the CO 2 management approach in China on a large scale. Develop 10 PDDs; 25 PINs. The aim of this project is to build the local capacity in CDM activities development, to improve the facilitation means for local stockholders, and to promote private sector investments and private developers involvement in CDM project activities. (1) Establishing provincial CDM Technical Service Unit; (2) implementing CDM training activities; (3) identifying and developing CDM projects. (1) Establishing provincial CDM Technical Service Unit and experts teams; (2) implementing CDM training activities; (3) identifying and developing CDM projects. The core activities consist of four blocks of training and seminars introducing the several features of CO 2 management. In addition, training materials, including tools to calculate and monitor CO 2 emissions, will be provided. (1) Establishing five provincial CDM Technical Service Units; (2) implementing CDM training activities; (3) identifying and developing CDM projects. The project consortium will build the local capacity in CDM project s development through the production of training materials, delivery of training programs, creation of a CDM database of PINs and promotion events (workshop and roundtables). 104 CDM IN CHINA

126 ANNEX 4 Agency/ Project Name Country Partners Duration Project Objectives Activities 10 China- Japan Shandong CDM Capacity Building Programme 11 China- France CDM Capacity Building Cooperation Programme 12 CDM Cooperation Programme in China UNDP Millennium Development Goals (MDGs) (1) Japan NEDO (2) Japan MHIR Agence Française de Développement/GEF UNDP ACCA21; departments of S&T; Shandong province. MOST/NDRC 4 Local Departments of S&T. MOST; CICETE; 12 Local Departments of S&T (including Jilin, Liaonig, inner Mongolia, Qinghai, Shanxi, Henan, Shaanxi, Anhui, Jiangsu, Xinjiang, Hubei). (1) March 2006 July 2006 (2) December 2006 March 2007 February 2007 February 2009 February 2007 December 2008 Develop 2 PDDs; 2 PINs. Finish 1 PDD per pilot, approved by Chinese DNA; 6 PINs per pilot; 50 potential-cdm project list per pilot. Develop 20 PDDs; 100 PINs. The program selected Shandong province to set up CDM center and experts team. Until now Shandong CDM center has developed three PDD documents and five PINs, and one of their CDM projects has been submitted to Chinese DNA for approval. Meanwhile, this project has also been validated by DOE. (1) Establishing four provincial CDM center and experts teams, including Yunnan, Guangxi, Guizhou, and Sichuan provinces; (2) finishing local investigation; (3) implementing capacity training workshops; developing CDM projects. (1) Establishing 12 provincial CDM centers and expert teams; (2) finishing local CDM potential investigation report; (3) implementing local capacity training workshops; developing CDM projects. (continued) CDM IN CHINA 105

127 ANNEX 4 Agency/ Project Name Country Partners Duration Project Objectives Activities 13 Sino- Danish Cooperation Project on CDM Capacity Building 106 CDM Capacity Building for Biomass Projects Programmatic CDM in China Realizing the Potential for Programmatic CDM in China and its Impacts CDM IN CHINA Danish: Executing agency: NDRC; financial management: CICETE; implementing partner: Energy Research Institute. Danish: Executing agency: NDRC; financial management: CICETE; implementing partner: CASS. January 2007 August 2008 March 2007 March ) Development of the capacity of key Chinese project developers active in the field of biomass to identify, develop, and manage CDM biomass projects; 2) development of the Chinese capacity at the central level to adapt CDM baseline and monitoring methodologies for biomass projects to China s actual situation and implement them; 3) development of capacity in selected provinces among officials and semi-officials focused on the identification and development of biomass CDM projects in China. 1) Analyze the feasibility, potential, and constraints of P-CDM project in China and possible policies and measures; 2) carry out in-depth analysis on the economic, social, and environmental impacts of P-CDM implementation in China; 3) perform the case studies, investigate the methodologies of and constraints to development of P- CDM project and measures to promote the development; and 4) extensively disseminate relevant knowledge and information about P-CDM. This project consists of two components: Component one Capacity building at the central level in Beijing, focusing on public and semipublic entities (biomass developers and Chinese consultants); survey on biomass technology and resources; capabilitybuilding needs assessment; adaptation of CDM methodologies to China s circumstances and preparation for training materials. Component two capacity building at the provincial level in three selected provinces, focusing on public and semipublic officials involved in methodology training as well as development of PINs and PDDs. 1) Comprehensively evaluate institution framework, policies, methodology, project development practice, and international carbon market; analyze the limitations of development of CDM project and necessity of putting P-CDM into practice; and analyze the potential of P-CDM, policies, methodology, and the influence on society and economy; 2) extensively investigate different industries and regions that suit the development of P-CDM projects and

128 ANNEX 4 Agency/ Project Name Country Partners Duration Project Objectives Activities 14 EU-China CDM Facilitation Project 15 China- Netherlands CDM Capacity Building Programme EU Netherlands ING Bank NDRC, China; SEPA, China; Swedish Environmental Research Institute IVL; Policy Research Center for Environment and Economy of SEPA; TÜV Rheinland, Germany; DEVELOPMENT Solutions, China. ACCA21; 5 Local Departments of S&T (including Heilongjiang, Chongqing, Jiangxi, Fujian, Guangdong). June 2007 January 2008 August 2007 August ) Strengthen the capacity of China s DNA, the National CDM Center, and Chinese DOEs; 2) introduce European and international standards in quality management of the CDM development process; 3) increase awareness of CDM opportunities in China. 10 PDD; 50 PINs per pilot; 250 potential-cdmproject list per pilot. select the target for case studies; 3) participate in relevant international and domestic meetings and workshops, keep track of the latest changes in relevant P-CDM rules and methodologies; 4) hold small workshops to summarize and revise the research results of this phase. 1) Policy and regulatory stakeholder training; 2) two-year capacity-building program for the National CDM Center; 3) year training program and capacity building for a selected potential Chinese DOE; 4) CDM road show with four EU-China CDM Conferences in Beijing, Shanghai, Chengdu, and Shenzhen; 5) 10 capacitybuilding and awareness-raising seminars in provinces (1) Establishing five provincial CDM centers and experts teams; (2) two PDDs per pilot, and 10 PINs per pilot approved by Chinese DNA; 50 potential-cdmproject list per pilot. (continued) CDM IN CHINA 107

129 ANNEX 4 Agency/ Project Name Country Partners Duration Project Objectives Activities 16 Accelerating reductions in GHG emissions (methane) from working coal mines 17 NDRC (China)/ NEDO (Japan) CDM Capacity Building UK NEDO Japan NDRC NEDO Division of Local Planning, Shaanxi Development Reform Committee Division of Local Economics, Shanxi Development Reform Committee ERI under NDRC. October 2007 June 2008 To build capacity to ensure the effective application of the CDM to reduce GHGs from China s coal mines. 1) Promote local public awareness of basic knowledge of CDM; 2) help local enterprises to identify potential CDM projects and improve local capacity of CDM development; 3) further strengthen the management of CDM projects by central and local governments; 4) develop 1 2 PDD. The project will establish a CDM assistance center to provide expert local support to coal mines and government, and carry out technical exchanges with mines to increase awareness of key climate and CDM issues, promote better data management, and improve gas capture and methane use. The project will produce a final report that includes recommendations and strategies for improving the effectiveness of CDM applications in China, increasing gas utilization, and reducing methane emissions from coal mines. This work is supporting the Government of China s efforts to improve coal-mine safety. 1) Capacity-building workshops in Shaanxi and Shanxi; 2) collection and selection of potential CDM project in two provinces. 108 CDM IN CHINA

130 ANNEX 4 Agency/ Project Name Country Partners Duration Project Objectives Activities 18 Seminar on Clean Development Mechanism (CDM) for Officials from African Countries 19 Seminar on Clean Development Mechanism (CDM) for Officials from Asian Countries Ministry of Commerce of China Ministry of Commerce of China Implementing Institute: CICETE Participants: CDM Project Center of Shandong Province; relevant departments of 17 African countries Implementing Institute: CICETE Participants: CDM Project Center of Shandong Province; relevant departments of Asian countries. November 2007 April 2008 Capacity-building workshops; site visit to Shandong Province. Capacity-building workshops; site visit to Jiangsu Province. (1) Share China s experience related to CDM in policy making, institution organizing, project planning, carbon trade, and environment protection; (2) discuss international rules and recent progress. (1) Share China s experience related to CDM in policy making, institution organizing, project planning, carbon trade, and environment protection; (2) discuss international rules and recent progress; (3) discuss the potential of development of CDM projects in Asian countries. CDM IN CHINA 109

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132 A N N E X Survey Questionnaire for CDM Foreign Private Actors A5 These questions were used in surveys conducted in 2007 and 2010, and summarized in Section 3.5: What are the key attractions of the Chinese CDM market? Have you encountered any difficulties doing CDM business in China? How would you rate the Chinese DNA approval process relative to that in other countries in which you do CDM business? If you could change one thing about Chinese CDM procedures, what would that be? What is the primary role of your company in the China CDM market? Does your company have an office located in China? Is this office staffed by Chinese nationals, international experts, or both? What functions do the Chinese staff perform? What is your basic approach to project identification in China? How do you rate the CDM awareness and implementation capacity of China CDM project owners compared with owners in other countries in which you do CDM business? Which project types have been straightforward to implement in China? Which have been problematic and why? What do you think about the prospects of programmatic CDM in China? Does uncertainty about the post-2012 climate regime influence your CDM business strategy in China, and in what way? CDM IN CHINA 111

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134 A N N E X Implementation of CDM Projects in the HKSAR A6 Following consultation with the government of the Hong Kong Special Administrative Region (HKSAR), the central government notified the United Nations that the Convention and the Protocol were extended to the HKSAR effective May Under the Convention and the Protocol, HKSAR is required to work jointly with the mainland to fulfill the obligations of parties not included in Annex I to the Convention (non-annex I parties). In accordance with the principles of One Country, Two Systems and the relevant provisions of the Basic Law, the implementation arrangements for CDM projects in HKSAR (hereinafter referred to as the HK Implementation Arrangements) are set out below. They have been drawn up with reference to the CDM Measures following consultation between NDRC and the Environmental Protection Department of the HKSAR Government (HKEPD). The HK Implementation Arrangements took effect as of June 6, The HK Implementation Arrangements stipulate the implementation institutes eligibility in Hong Kong; the application files required to apply for CDM projects in Hong Kong; the implementation rules for unilateral projects; and the revenue for CDM projects in Hong Kong. The HK Implementation Arrangements specify the following: NDRC is the central government s DNA for CDM project activities; HKEPD is the liaison agency for CDM projects relating to HKSAR. Companies that are incorporated or established according to the Companies Ordinance or other relevant HKSAR legislation, and that have obtained a valid Business Registration Certificate, are able to implement CDM projects in HKSAR. Any applications, reports, and supporting information (including) provided by project owners implementing CDM projects in HKSAR shall be submitted through HKEPD. The format of documents submitted shall conform to the specific requirements of NDRC, the Chinese version of which shall be presented in simplified characters. The two additional documents will be forwarded by HKEPD to NDRC within five working days from receipt of full documentation. In the event of problems, NDRC will inform the project owner through HKEPD. In accordance with the Measures, NDRC will entrust expert review of project applications to relevant organizations, and will submit applications approved by the experts to the National CDM Board (hereinafter referred to as the Board ). CDM IN CHINA 113

135 ANNEX 6 Representatives from HKEPD will participate in the work of the Board upon the Board s review of CDM projects to be implemented in HKSAR. Other procedures and approvals required for the construction projects will be processed in accordance with the statutory requirements of HKSAR. Project owners will, in accordance with the Measures, present project implementation and monitoring reports to NDRC and the designated operational entity via HKEPD. To ensure the quality of the CDM project activities, HKEPD may monitor the implementation of the CDM projects in HKSAR and present the findings to NDRC. If no foreign buyer is determined by the time a CDM project to be implemented in HKSAR is submitted for approval, and as a result, the price information of the transferable CERs is not available, the project design document must indicate that the emission reductions generated by the project will be transferred to China s national account. The project owner may transfer these reductions from the national account for use upon notifying the central government s DNA for CDM via HKEPD. Until further notice, no charges will be levied by the central government or the HKSAR government on the revenue generated from the transfer of the CERs of CDM projects implemented in HKSAR, including projects on energy efficiency improvement, development and use of new and renewable energy, and methane recovery and utilization. APPLICATION AND APPROVAL PROCEDURES FOR CDM PROJECTS IN HKSAR The CDM implementation institutes shall be companies that are incorporated or established according to the Companies Ordinance or other relevant HKSAR legislation and that have obtained a valid Business Registration Certificate in HKSAR. The approval procedure includes many of the same steps and processes as on the mainland, as well as some exclusive to HKSAR. For example, applications, reports, and supporting information provided by project owners implementing HKSAR-based CDM projects must be submitted through HKEPD; they will be forwarded by HKEPD to NDRC within five working days of receipt of full documentation. In the event of problems, NDRC will inform the project owner through HKEPD, and representatives from HKEPD will participate in the work of the Board upon the Board s review of the project. Another difference in the HKSAR process is that, as of this writing, no charges will be levied by the central government or the HKSAR government on revenue from the transfer of CERs of HKSAR CDM projects, including projects on energy-efficiency improvement, development and use of new and renewable energy, and methane recovery and utilization. 114 CDM IN CHINA

136 CDM Project Management Center Energy Research Institute, National Development and Reform Commission Phone: Fax: Block B-1518, Jia No. 11, Muxudibeili, Xicheng Dist., Beijing , China Carbon Finance-Assist Program Climate Change Practice - World Bank Institute Phone: Fax: H Street, N.W. Washington, DC 20433, USA Social, Environment, Rural Development Sector Unit Sustainable Development Department, East Asia and Pacific Region, Phone: Fax: H Street, N.W. Washington, DC20433, USA Sustainable Development Department, China & Mongolia The World Bank Office, Beijing Phone: Fax: th Floor, China World Tower 2 No. 1 Jianguomenwai Avenue, Beijing , China